Surprise Volume and Heteroskedasticity in Equity Market Returns

Niklas Wagner and Terry A. Marsh

Econometrics from University Library of Munich, Germany

Abstract: Heteroskedasticity in returns may be explainable by trading volume. We use different volume variables, including surprise volume---i.e. unexpected above-average trading activity---which is derived from uncorrelated volume innovations. Assuming weakly exogenous volume, we extend the Lamoureux and Lastrapes (1990) model by an asymmetric GARCH in-mean specification following Golsten et al. (1993). Model estimation for the U.S. as well as six large equity markets shows that surprise volume provides superior model fit and helps to explain volatility persistence as well as excess kurtosis. Surprise volume reveals a significant positive market risk premium, asymmetry, and a surprise volume effect in conditional variance. The findings suggest that, e.g., a surprise volume shock (breakdown)---i.e. large (small) contemporaneous and small (large) lagged surprise volume---relates to increased (decreased) conditional market variance and return.

Keywords: ARCH; trading volume; return volume dependence; asymmetric volatility; market risk premium; leverage effect (search for similar items in EconPapers)
JEL-codes: C13 G10 G15 (search for similar items in EconPapers)
Date: 2004-09-15
New Economics Papers: this item is included in nep-cfn, nep-ets and nep-fin
Note: Type of Document - none; prepared on win; to print on hp;
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Surprise volume and heteroskedasticity in equity market returns (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0409009

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