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Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility

  • Andersen, Torben G

This paper develops an empirical return volatility-trading volume model from a microstructure framework in which informational asymmetries and liquidity needs motivate trade in response to information arrivals. The resulting system modifies the so-called 'mixture of distribution hypothesis' (MDH). The dynamic features are governed by the information flow, modeled as a stochastic volatility process, and generalize standard autoregressive conditional heteroskedasticity specifications. Specification tests support the modified MDH representation and show that it vastly outperforms the standard MDH. The findings suggest that the model may be useful for analysis of the economic factors behind the observed volatility clustering in returns. Copyright 1996 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 51 (1996)
Issue (Month): 1 (March)
Pages: 169-204

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Handle: RePEc:bla:jfinan:v:51:y:1996:i:1:p:169-204
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  1. Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
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  16. Lamoureux, Christopher G & Lastrapes, William D, 1994. "Endogenous Trading Volume and Momentum in Stock-Return Volatility," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 253-60, April.
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