Long Memory and Tail Dependence in Trading Volume and Volatility

CREATES Research Paper No. 2009-30

41 Pages Posted: 16 Jul 2009 Last revised: 9 Apr 2011

See all articles by Eduardo Rossi

Eduardo Rossi

Department of Economics and Management

Paolo Santucci de Magistris

Aarhus University - CREATES

Date Written: December 17, 2010

Abstract

In this paper we investigate the relationship between volatility, measured by realized volatility, and trading volume. We show that volume and volatility are long memory but they are not driven by the same latent factor as suggested by the fractional cointegration analysis. We analyze the degree of tail dependence of the two series finding that this is induced by the extreme dependence in the volatility and volume innovations. Tail dependence is particularly interesting, since, it is informative on the specific behavior of the volatility and volume when large surprising news impact the market. We use a fractionally integrated VAR with shock distributions modeled with a mixture of copulae functions to describe the joint dynamics. The model is able to capture the main characteristic of the series, say long memory, marginal non-normality and tail dependence. Once that long memory is removed, past volume are informative about the present volatility, and this result can be exploited for forecasting purposes. This evidence should be therefore taken into account when building a realistic model, linking volatility and volume.

Keywords: Realized Volatility, Trading Volume, Fractional Cointegration, Tail dependence, Copula Modeling

JEL Classification: C32, G12

Suggested Citation

Rossi, Eduardo and Santucci de Magistris, Paolo, Long Memory and Tail Dependence in Trading Volume and Volatility (December 17, 2010). CREATES Research Paper No. 2009-30, Available at SSRN: https://ssrn.com/abstract=1434789 or http://dx.doi.org/10.2139/ssrn.1434789

Eduardo Rossi (Contact Author)

Department of Economics and Management ( email )

Via San Felice 5
27100 Pavia
Italy
++ (Phone)

Paolo Santucci de Magistris

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allè 4
Aarhus V, 8210
Denmark

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