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Empirical study on relationship between persistence-free trading volume and stock return volatility

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  • Fenghua, Wen
  • Xiaoguang, Yang
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    Abstract

    A large body of literature finds that the unexpected trading volume, which is obtained by filtering out time trend, autocorrelation, can be used as a proxy of the information flow and can explain the heteroskedasticity of stock return in some degrees. In this paper, we find that the heteroskedasticity exists in the unexpected trading volume, and we further generate a new information proxy by filtering out the heteroskedasticity from the unexpected trading volume, termed "persistence-free trading volume". Our empirical results indicate that the persistence-free trading volume can explain the heteroskedasticity of the return better than the unexpected trading volume; moreover, the explanatory power of the persistence-free trading volume is positively related to market maturity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Global Finance Journal.

    Volume (Year): 20 (2009)
    Issue (Month): 2 ()
    Pages: 119-127

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    Handle: RePEc:eee:glofin:v:20:y:2009:i:2:p:119-127

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    Web page: http://www.elsevier.com/locate/inca/620162

    Related research

    Keywords: Information flow Trading volume Heteroskedasticity Persistence-free trading volume Stock return;

    References

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    1. Ramaprasad Bhar & Shigeyuki Hamori, 2004. "Information Flow between Price Change and Trading Volume in Gold Futures Contracts," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 3(1), pages 45-56, April.
    2. Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 221-29, March.
    3. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    4. Lo, Andrew W & Wang, Jiang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(2), pages 257-300.
    5. Tarun Chordia & Bhaskaran Swaminathan, 2000. "Trading Volume and Cross-Autocorrelations in Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 913-935, 04.
    6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
    7. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    8. M. F. Omran & E. McKenzie, 2000. "Heteroscedasticity in stock returns data revisited: volume versus GARCH effects," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(5), pages 553-560.
    9. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    10. Ho-Mou Wu & Wen-Chung Guo, 2004. "Asset price volatility and trading volume with rational beliefs," Economic Theory, Springer, Springer, vol. 23(4), pages 795-829, May.
    11. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 44(2), pages 305-21, March.
    12. Kate Phylaktis & Manolis G Kavussanos & Gikas Manalis, 1996. "Stock prices and the flow of information in the Athens Stock Exchange," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 2(1), pages 113-126.
    13. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(2), pages 400-438, August.
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    Cited by:
    1. Girardin, Eric & Joyeux, Roselyne, 2013. "Macro fundamentals as a source of stock market volatility in China: A GARCH-MIDAS approach," Economic Modelling, Elsevier, Elsevier, vol. 34(C), pages 59-68.

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