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Modeling Stock Volatility with Trading Information

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    Abstract

    This paper studies volatility in individual stocks of the Toronto Stock Exchange (TSE), using a recently developed nonlinear approach, a stochastic threshold model. Trading information is embedded into the determination process for volatility in the stochastic threshold model with a generalized conditional heteroskeasticitic variance (STGARCH). We use the number of price changes (quote changes) to approximate the trading information. This trading variable has significantly positive impact on stock volatility following a declining market and ambiguous impact on the stock volatility following a rising market; there is higher probability to fall into a highly volatile state after a declining market than after a rising market. The GARCH- type persistence in volatility is reduced significantly in our nonlinear model for individual stocks with high persistence. The STGARCH model also gives satisfactory fitting in terms of alternative model selection criteria. Keywords: Volatility; Asymmetry; Trading variable; Information arrivals; Stochastic threshold

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    Bibliographic Info

    Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 9904.

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    Date of creation: Jan 1999
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    Handle: RePEc:uwo:uwowop:9904

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    Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
    Phone: 519-661-2111 Ext.85244
    Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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