Stochastic Volatility, Trading Volume, and the Daily Flow of Information

Rice University, Jones Graduate School Working Paper

39 Pages Posted: 24 Jul 2001

See all articles by Jeff Fleming

Jeff Fleming

Rice University - Jesse H. Jones Graduate School of Business

Chris Kirby

UNC Charlotte - Belk College of Business

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 26, 2004

Abstract

We use state-space methods to investigate the relation between volume, volatility, and ARCH effects within a Mixture-of-Distributions Hypothesis (MDH) framework. In most recent studies of the MDH, the information flow or its logarithm is modeled as an AR(1) process. We argue that this is too restrictive because it requires the information flow to be highly persistent. Using a more general process, we find evidence of a large nonpersistent component of return volatility that is closely related to the contemporaneous nonpersistent component of trading volume. However, unlike previous studies that fit volume-augmented GARCH models, we find no evidence that trading volume subsumes ARCH effects. Because volume-augmented GARCH models are subject to simultaneity bias, our findings should be more robust than these prior results.

Keywords: GARCH, mixture-of-distributions hypothesis, bivariate mixture models, Kalman filter

JEL Classification: G12, C22

Suggested Citation

Fleming, Jeff and Kirby, Chris and Ostdiek, Barbara, Stochastic Volatility, Trading Volume, and the Daily Flow of Information (May 26, 2004). Rice University, Jones Graduate School Working Paper. Available at SSRN: https://ssrn.com/abstract=276912 or http://dx.doi.org/10.2139/ssrn.276912

Jeff Fleming

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-4677 (Phone)
713-348-5251 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~jfleming

Chris Kirby (Contact Author)

UNC Charlotte - Belk College of Business ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Barbara Ostdiek

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713-348-5384 (Phone)
713-348-5251 (Fax)

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