Testing the Mixture of Distributions Hypothesis Using "Realized" Volatility

24 Pages Posted: 28 Feb 2002

See all articles by James C. Luu

James C. Luu

UNSW Australia Business School, School of Banking and Finance

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Date Written: February 2002

Abstract

The mixture of distributions hypothesis (MDH) posits that price volatility and trading volume are determined by the same information arrival rate. Existing studies that test MDH have the problem that both the information arrival rate and volatility are unobservable. Recent work (e.g. Andersen, Bollerslev, Diebold and Ebens (2001)) suggests that intraday returns can be used to construct estimates of daily return volatility that are more precise than those constructed using daily returns. In a way realized volatility becomes observable. Conducting a number of indirect tests of MDH we find that every conclusion based on the daily squared return is reversed when using realized volatility based on intraday returns. Hence, the mixed evidence on MDH in the existing literature can in part be attributed to the use of poor realized volatility measures.

Keywords: Mixture of Distributions Hypothesis, high-frequency data

JEL Classification: G10

Suggested Citation

Luu, James C. and Martens, Martin P.E., Testing the Mixture of Distributions Hypothesis Using "Realized" Volatility (February 2002). Available at SSRN: https://ssrn.com/abstract=301363 or http://dx.doi.org/10.2139/ssrn.301363

James C. Luu

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93856347 (Fax)

Martin P.E. Martens (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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