Intraday volatility and trading activity dynamics in Bangladesh’s capital market

Abstract

This study examines the relationship between trading activity and intraday price volatility in the Dhaka Stock Exchange (DSE) using firm-level panel data covering 80 listed firms over the period 2013–2023. Employing firm-level fixed effects with Driscoll–Kraay standard errors, the analysis investigates how liquidity measures, including trading volume, turnover, and number of trades, influence daily intraday volatility constructed from high–low price ranges. The findings indicate that higher trading volume leads to a significant increase in the volatility, which is consistent with the mixture of distributions hypothesis. On the other hand, turnover has a significantly negative influence on price, and it is interesting to note that higher trading value can assure the price stability and market efficiency. Trade number has a weaker positive effect, and both the COVID-19 dummy and market-level returns have an insignificant effect when liquidity is considered. The inclusion of lagged volatility reveals strong persistence in volatility dynamics, highlighting the importance of temporal dependence in price fluctuations. To address potential endogeneity arising from simultaneity between trading activity and volatility, an instrumental variable (IV-2SLS) approach is employed, and the results remain robust. Robustness checks using alternative volatility measures, including Parkinson and Garman–Klass estimators, confirm the stability of the findings. The results are consistent with a hybrid mechanism in which both information-driven trading and noise-driven behavior influence price formation, particularly in a retail-dominated market environment. Overall, the study provides firm-level evidence on the volatility liquidity nexus in a frontier market context and offers insights into how structural features such as retail participation and limited liquidity shape market dynamics.