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A Simultaneous Equations Model of Returns, Volatility, And Volume With Intraday Trading Dynamics

Author

Listed:
  • Megan Y. Sun
  • June F. Li

Abstract

This paperextends the finance literature by modeling stock returns, volatility, andvolume in a simultaneous equations model while incorporating the effects oftrading dynamics on these three variables. Evidence shows that returns, volatility, and volume are interrelated. However, research typically examined them asthree separate relationships between each pair of the three variables. Priorliterature has also failed to examine the impact of intraday trading dynamicson returns, volatility, and volume. Thisstudy overcomes both limitations. Usinga simultaneous equations model that incorporates feedbacks among these threevariables, this study documents that intraday skewness hassignificant impacts on daily returns, volatility, and volume. In addition, the two-way relationshipsbetween the variables change significantly when they are estimatedsimultaneously. The findings in thisstudy deepen our understanding of the relationships between returns,volatility, and volume and have important implications for traders, portfoliomanagers, and other market participants.

Suggested Citation

  • Megan Y. Sun & June F. Li, 2015. "A Simultaneous Equations Model of Returns, Volatility, And Volume With Intraday Trading Dynamics," Accounting and Finance Research, Sciedu Press, vol. 4(2), pages 1-50, May.
    • Handle: RePEc:jfr:afr111:v:4:y:2015:i:2:p:50
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    References listed on IDEAS

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    1. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. "An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-739, July.
    2. Liesenfeld, Roman, 1998. "Dynamic Bivariate Mixture Models: Modeling the Behavior of Prices and Trading Volume," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(1), pages 101-109, January.
    3. George H. K. Wang & Jot Yau, 2000. "Trading volume, bid–ask spread, and price volatility in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(10), pages 943-970, November.
    4. Liesenfeld, Roman, 2001. "A generalized bivariate mixture model for stock price volatility and trading volume," Journal of Econometrics, Elsevier, vol. 104(1), pages 141-178, August.
    5. Bange, Mary M., 2000. "Do the Portfolios of Small Investors Reflect Positive Feedback Trading?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 239-255, June.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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