Return volatility and trading volume: An information flow interpretation of stochastic volatility

Research output: Contribution to journalArticlepeer-review

594 Scopus citations

Abstract

The paper develops an empirical return volatility-trading volume model from a microstructure framework in which informational asymmetries and liquidity needs motivate trade in response to information arrivals. The resulting system modifies the so-called "Mixture of Distribution Hypothesis" (MDH). The dynamic features are governed by the information flow, modeled as a stochastic volatility process, and generalize standard ARCH specifications. Specification tests support the modified MDH representation and show that it vastly outperforms the standard MDH. The findings suggest that the model may be useful for analysis of the economic factors behind the observed volatility clustering in returns.

Original languageEnglish (US)
Pages (from-to)169-204
Number of pages36
JournalJournal of Finance
Volume51
Issue number1
DOIs
StatePublished - Mar 1996

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Return volatility and trading volume: An information flow interpretation of stochastic volatility'. Together they form a unique fingerprint.

Cite this