A Three-Stage Model of the Volume-Volatility Relation in the Junk Bond Market during the 2007–2008 Financial Crisis

Managerial Finance, Forthcoming

29 Pages Posted: 8 Nov 2019

Date Written: October 29, 2019

Abstract

This article examines the joint dynamics of volatility-volume relation in the high-yield (junk) corporate bond market during the 2007-2008 financial crisis. I propose a new empirical model of three-stage equations to better estimate the volatility-volume relation that helps in alleviating econometric problems. My central finding is that different methodologies can easily lead to different inferences about the volatility-volume relation in the junk bond market. More specifically, conclusions about the statistical significance and/or the direction of the association between both variables is dependent on the econometric methodology used. From a practitioner perspective, it is important for professional traders holding positions in fixed income securities in their trading accounts to be aware of their asymmetric time-varying volatility-volume shifting trends. Such knowledge helps traders diversify their positions and manage their portfolios more appropriately.

Keywords: Junk bond; trading volume; asymmetric volatility; endogeneity.

JEL Classification: C24; C26; G12.

Suggested Citation

Yamani, Ehab Abdel-Tawab, A Three-Stage Model of the Volume-Volatility Relation in the Junk Bond Market during the 2007–2008 Financial Crisis (October 29, 2019). Managerial Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3477465 or http://dx.doi.org/10.2139/ssrn.3477465

Ehab Abdel-Tawab Yamani (Contact Author)

Chicago State University ( email )

College of Business
9501 S. King Drive / BHS 411
Chicago, IL 60628
United States
773-995-3954 (Phone)

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