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The effects of trading activity on market volatility

  • Giampiero Gallo
  • Barbara Pacini

The paper re-examines the question of excessive implied persistence of volatility estimates when GARCH type models are used. Ten actively traded US stocks are considered and as already established in the literature, when volume traded is inserted in the GARCH (1, 1) or (EGARCH 1, 1) models for returns, the estimated persistence is decreased. Since volume is affected also by within-the-day price movements and hence is not weakly exogenous relative to returns, alternative proxies for trading activities are suggested. It is concluded that the difference between the opening price and the closing price of the previous day accounts also for most of the persistence in the autoregressive conditional heteroskedasticity.

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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 6 (2000)
Issue (Month): 2 ()
Pages: 163-175

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Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:163-175
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  1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  2. Rabemananjara, R & Zakoian, J M, 1993. "Threshold Arch Models and Asymmetries in Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 31-49, Jan.-Marc.
  3. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  4. 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.
  5. Bollerslev, Tim & Engle, Robert F. & Nelson, Daniel B., 1986. "Arch models," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 49, pages 2959-3038 Elsevier.
  6. 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.
  7. Berry, Thomas D & Howe, Keith M, 1994. " Public Information Arrival," Journal of Finance, American Finance Association, vol. 49(4), pages 1331-46, September.
  8. 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.
  9. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  10. Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
  11. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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