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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

Suggested Citation

  • Huirong Li & Jian Yang, 1999. "Modeling Stock Volatility with Trading Information," University of Western Ontario, Departmental Research Report Series 9909, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:9909
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    1. Harry G. Johnson, 1953. "Optimum Tariffs and Retaliation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(2), pages 142-153.
    2. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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