Testing the Mixture of Distributions Hypothesis Using "Realized" Volatility
24 Pages Posted: 28 Feb 2002
Date Written: February 2002
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: Suggested Citation