Stochastic Volatility, Trading Volume, and the Daily Flow of Information
Posted: 25 Oct 2004
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: Suggested Citation