Surprise Volume and Heteroskedasticity in Equity Market Returns

40 Pages Posted: 17 Sep 2004 Last revised: 22 Aug 2008

See all articles by Niklas Wagner

Niklas Wagner

Passau University

Terry Marsh

Quantal International Inc.

Date Written: February 1, 2005


Heteroskedasticity in returns may be explainable by trading volume. We use different volume variables, including surprise volume - i.e. unexpected above-average trading activity - which is derived from uncorrelated volume innovations. Assuming weakly exogenous volume, we extend the Lamoureux and Lastrapes (1990) model by an asymmetric GARCH in-mean specification following Glosten et al. (1993). Model estimation for the U.S. as well as six large equity markets shows that surprise volume provides superior model fit and helps to explain volatility persistence as well as excess kurtosis. Surprise volume reveals a significant positive market risk premium, asymmetry, and a surprise volume effect in conditional variance. The findings suggest that, e.g., a surprise volume shock (breakdown) - i.e. large (small) contemporaneous and small (large) lagged surprise volume - relates to increased (decreased) conditional market variance and return.

Keywords: ARCH, trading volume, return volume dependence, asymmetric

JEL Classification: C13, G10, G15

Suggested Citation

Wagner, Niklas F. and Marsh, Terry, Surprise Volume and Heteroskedasticity in Equity Market Returns (February 1, 2005). Available at SSRN: or

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030

Terry Marsh

Quantal International Inc. ( email )

Two Embarcadero Center
8th Floor
San Francisco, CA 94111
United States
415-744-5301 (Phone)


Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics