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New evidence on the relation between return volatility and trading volume

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Author Info

  • Thomas C. Chiang

    (Department of Finance, Drexel University, Philadelphia, PA, USA)

  • Zhuo Qiao

    (Faculty of Business Administration, University of Macau, Macau)

  • Wing-Keung Wong

    (Department of Economics, Hong Kong Baptist University, Hong Kong)

Abstract

In the empirical literature, it has been shown that there exists both linear and non-linear bi-directional causality between trading volumes and return volatility (measured by the square of daily return). We re-examine this claim by using realized volatility as an estimator of the unobserved volatility, adopting a stationary de-trended trading volume, and applying a more recent data sample with robustness tests over time. Our linear Granger causality test shows that there is no causal linear relation running from volume to volatility, but there exists an ambiguous causality for the reverse direction. In contrast, we find strong bi-directional non-linear Granger causality between these two variables. On the basis of the non-linear forecasting modeling technique, this study provides strong evidence to support the sequential information hypothesis and demonstrates that it is useful to use lagged values of trading volume to predict return volatility. Copyright © 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1151
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 29 (2010)
Issue (Month): 5 ()
Pages: 502-515

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Handle: RePEc:jof:jforec:v:29:y:2010:i:5:p:502-515

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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Cited by:
  1. Souček, Michael & Todorova, Neda, 2013. "Realized volatility transmission between crude oil and equity futures markets: A multivariate HAR approach," Energy Economics, Elsevier, vol. 40(C), pages 586-597.
  2. repec:wyi:journl:002214 is not listed on IDEAS
  3. Chen, Haiqiang & Chong, Terence Tai Leung & She, Yingni, 2013. "A Principal Component Approach to Measuring Investor Sentiment in China," MPRA Paper 54150, University Library of Munich, Germany.
  4. Julien Chevallier & Benoît Sévi, 2011. "On the volatility-volume relationship in energy futures markets using intraday data," EconomiX Working Papers 2011-16, University of Paris West - Nanterre la Défense, EconomiX.

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