Intraday Dynamics of Volatility and Duration: Evidence from Chinese Stocks
26 Pages Posted: 12 Nov 2011
Date Written: May 11, 2011
We propose a new joint model of intraday returns and durations to study the dynamics of several Chinese stocks. We include IBM from the U.S. market for comparison purposes. Flexible innovation distributions are used for durations and returns, and the total variance of returns is decomposed into different volatility components associated with different transaction horizons. Our new model strongly dominates existing specifications in the literature. The conditional hazard functions are non-monotonic and there is strong evidence for different volatility components. Although diurnal patterns, volatility components, and market microstructure implications are similar across the markets, there are interesting differences. Durations for lightly traded Chinese stocks tend to carry more information than heavily traded stocks. Chinese investors usually have longer investment horizons, which may be explained by the specific trading rules in China.
Keywords: Market microstructure, Transaction horizon, High-frequency data, ACD, GARCH
JEL Classification: C22, C11, G10
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