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Return-Volume Dependence and Extremes in International Equity Markets

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Author Info
Niklas Wagner (Munich University of Technology)
Terry Marsh (Haas School of Business, University of California, Berkeley)
Abstract

This paper is an empirical study of the price-volume dependence in seven international equity markets. We fit a GARCH-M model to examine the overall return-volume relation under "normal" market conditions and a bivariate extreme value model to examine the relation under conditions of market stress. Using a pre-filtered stationary volume variable for each market, we find that: (i) volume explains a substantial amount of conditional return variance in most markets, and indeed for the U.S., GARCH effects are completely subsumed by the volume variable; (ii) above-average volume explains variation in conditional variance better than the entire set of volume observations; (iii) conditioning market return variance on volume provides a risk measure that is associated with a positive premium; (iv) for all markets but the U.S., negative return innovations relate to a larger increase in conditional return variance than positive return innovations; (v) the return variability-volume dependence is weaker, albeit mostly significant, in the tails -- i.e. for extremal return and volume observations -- where (vi) the dependence decreases for large extremal return and volume observations. We argue that our results are more consistent with a Genotte and Leland (1990) misinterpretation hypothesis for market crashes than with cascade or behavioral explanations which associate high volume with steep price declines.

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Paper provided by Research Program in Finance, Institute for Business and Economic Research, UC Berkeley in its series Research Program in Finance, Working Paper Series with number 1002.

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Date of creation: 02 May 2000
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Handle: RePEc:cdl:rpfina:1002

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Related research
Keywords: C13; G10; G15; Trading volume; return-volume dependence; mixture of distributions hypothesis; extreme returns; bivariate extremal dependence; market crashes;

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