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

Posted: 25 Oct 2004

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

Abstract

We use state-space methods to investigate the relation between volume, volatility, and ARCH effects within a Mixture-of-Distributions Hypothesis (MDH) framework. Most recent studies of the MDH fit AR(1) specifications that require the information flow to be highly persistent. Using a more general specification, we find evidence of a large nonpersistent component of volatility that is closely related to the contemporaneous nonpersistent component of volume. However, unlike studies that fit volume-augmented GARCH models, we find no evidence that volume subsumes ARCH effects. Since 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. Journal of Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=608303

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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