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Long memory in volatility and trading volume

  • Fleming, Jeff
  • Kirby, Chris

We use fractionally-integrated time-series models to investigate the joint dynamics of equity trading volume and volatility. Bollerslev and Jubinski (1999) show that volume and volatility have a similar degree of fractional integration, and they argue that this evidence supports a long-run view of the mixture-of-distributions hypothesis. We examine this issue using more precise volatility estimates obtained using high-frequency returns (i.e., realized volatilities). Our results indicate that volume and volatility both display long memory, but we can reject the hypothesis that the two series share a common order of fractional integration for a fifth of the firms in our sample. Moreover, we find a strong correlation between the innovations to volume and volatility, which suggests that trading volume can be used to obtain more precise estimates of daily volatility for cases in which high-frequency returns are unavailable.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 7 (July)
Pages: 1714-1726

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1714-1726
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