Arch Effects and Trading Volume

32 Pages Posted: 26 Sep 2005

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

Date Written: September 2005

Abstract

Studies that fit volume-augmented GARCH models often find support for the hypothesis that trading volume explains ARCH effects in daily stock returns. We show that this finding is due to an unrecognized constraint imposed by the GARCH specification used for the analysis. Using a more flexible specification, we find no evidence that inserting volume into the conditional variance function of the model reduces the importance of lagged squared returns in capturing volatility dynamics. Volume is strongly correlated with contemporaneous return volatility, but the correlation is driven largely by transitory volatility shocks that have little to do with the highly persistent component of volatility captured by standard volatility models.

Keywords: volume-volatility relation, information flow, two-component GARCH, bivariate mixture model, mixture of distributions hypothesis

JEL Classification: C22, G10

Suggested Citation

Fleming, Jeff and Kirby, Chris and Ostdiek, Barbara, Arch Effects and Trading Volume (September 2005). Available at SSRN: https://ssrn.com/abstract=803838 or http://dx.doi.org/10.2139/ssrn.803838

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
318
Abstract Views
1,557
rank
93,382
PlumX Metrics