Volume and Volatility: News or Noise?

Scott Mixon

The Financial Review, 2001, vol. 36, issue 4, 99-118

Abstract: This paper presents a market microstructure model that is consistent with several empirical regularities. The model embeds separate latent ARCH-like volatility processes: one representing movements in the underlying fundamental and one representing noise caused by the trading process. This structure allows the regularities to depend either on news or noise. The heteroskedasticity and persistence in the data are due to both ARCH-like processes. The model has difficulty in simultaneously capturing the size and persistence of trading volume. Several extensions of the basic model, particularly including a constant level of non-informational trading, improve the model's ability to capture the relevant characteristics of the data. Copyright 2001 by MIT Press.

Date: 2001
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