Chapter 3. Forecasting Volume

Price formation on stock exchanges has been the center of attention of many researchers for several decades now. As a result, there is an abundance of theories, models, and empirical evidence on the price, and although there are always new aspects to discover, we believe that the financial knowledge is fairly comprehensive on the subject. We understand the dynamics of the price reasonably well, and most of us agree that it is rather difficult to forecast.

In contrast, the trading volume, which is another fundamental measure of the trading process on stock exchanges, has been much less researched. The most common equilibrium models on price do not even include volume in their framework of explaining trading activities. It is only recently that researchers appear to be paying increasing attention to volume, and they have already found that its stylized facts allow for much better forecasts compared to price.

This chapter aims to introduce an intra-day...