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

Jeff Fleming, Chris Kirby and Barbara Ostdiek
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Jeff Fleming: Rice University
Barbara Ostdiek: Rice University

Journal of Business, 2006, vol. 79, issue 3, pages 1551-1590

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, in contrast to 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.

Date: 2006
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