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Modelling the Intraday Return Volatility Process In The Australian Equity Market: An Examination Of The Role Of Information Arrival In S&P/Asx 50 Stocks

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  • Andrew C. Worthington
  • Helen Higgs

Abstract

This paper examines the intraday return volatility process in Australian company stocks. The data set employed consists of five-minute returns, trading volumes and bid-ask spreads over the period 31 December 2002 to 4 March 2003 for the fifty national and multinational stocks comprising the S&P/ASX 50 index. GARCH is used to model the time-varying variance in the intraday return series and the inclusion of news arrival as proxied by the contemporaneous and lagged volume of trade and bid-ask spread is used as an exogenous explanatory variable. The results indicate strong persistence in volatility for the fifty stocks even with the contemporaneous and lagged volume of trade and bid-ask spread included as explanatory variables in the models. Overall, while there is much variation among the stocks included in terms of the role of the irregular arrival of new information in generating GARCH effects and the degree of persistence, all of the volatility processes are mean reverting.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20150%20Worthington%20&%20Higgs.pdf
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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 150.

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Date of creation: 20 Jul 2003
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Handle: RePEc:qut:dpaper:150

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Keywords: return volatility; trading volume; bid-ask spread; GARCH;

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  1. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-37, July.
  2. Kim, Dongcheol & Kon, Stanley J, 1994. "Alternative Models for the Conditional Heteroscedasticity of Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 563-98, October.
  3. Rahman, Shafiqur & Lee, Cheng-few & Ang, Kian Ping, 2002. " Intraday Return Volatility Process: Evidence from NASDAQ Stocks," Review of Quantitative Finance and Accounting, Springer, vol. 19(2), pages 155-80, September.
  4. Baillie, Richard T. & DeGennaro, Ramon P., 1990. "Stock Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(02), pages 203-214, June.
  5. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
  6. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
  7. Lee, Cheng F & Chen, Gong-meng & Rui, Oliver M, 2001. "Stock Returns and Volatility on China's Stock Markets," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 24(4), pages 523-43, Winter.
  8. Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, vol. 45(1), pages 221-29, March.
  9. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  10. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
  11. Chan, K C & Christie, William G & Schultz, Paul H, 1995. "Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities," The Journal of Business, University of Chicago Press, vol. 68(1), pages 35-60, January.
  12. Locke, P R & Sayers, C L, 1993. "Intra-day Futures Price Volatility: Information Effects and Variance Persistence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 15-30, Jan.-Marc.
  13. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  14. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
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