between volume and volatility has received much attention in the
literature on financial markets. However, due to the lack of data, few
results have been presented for the foreign exchange (FX) market.
Furthermore, most studies contain only aggregate series, and cannot
distinguish between the impact of different participants or instruments.
We study the impact of volume on volatility in the FX market using a
unique data set of daily trading in the Swedish krona (SEK) market. The
data set covers 95 percent of worldwide SEK trading, and is
disaggregated on a number of reporting banks’ buying and selling in five
different instruments on a daily basis from 1995 until 2002. We find
that volume in general shows a positive correlation with volatility.
However, the strength of the relationship depends on the instrument
traded and the identity of the reporting bank. In particular, we find
that trading tends to concentrate around the largest banks during
periods of high volatility. These banks are probably also best informed.
This is especially the case when volatility is high. We interpret this
as evidence that heterogeneous expectations are important to an
understanding of the volume-volatility relationship.