Volatility dynamics and heterogeneous markets

David G. McMillan and Alan E. H. Speight
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David G. McMillan: School of Economics, Finance and Business, University of Durham, UK, Postal: School of Economics, Finance and Business, University of Durham, UK
Alan E. H. Speight: Department of Economics, University of Wales, Swansea, UK, Postal: Department of Economics, University of Wales, Swansea, UK

International Journal of Finance & Economics, 2006, vol. 11, issue 2, 115-121

Abstract: Recent research has suggested that intra-day volatility may possess a component structure, resulting either from the arrival of heterogeneous information or the actions of heterogeneous market agents. This paper reports direct evidence for the existence of such components in S&P500 index and DM|$ exchange rate data. Estimation of a FIGARCH model supports the contention that volatility dynamics result from multiple sources. Using a HARCH conditional variance model which defines volatility components over differing time horizons, confirmatory evidence of heterogeneous components is reported, in which context the impact of high-frequency speculation and noise-trading are particularly apparent. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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DOI: 10.1002/ijfe.281

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