An empirical study on the role of trading volume and data frequency in volatility forecasting

This research investigates the role of trading volume and data frequency in volatility forecasting by evaluating the performance of Generalized Autoregressive Conditional Heteroskedasticity Mixed‐Data Sampling (GARCH‐MIDAS), traditional GARCH, and intraday GARCH models. We take trading volume as the proxy for information flow and examine whether the Sequential Information Arrival Hypothesis (SIAH) is supported in the China stock market. The contributions of this study are as follows. (1) We provide a more consistent comparison to evaluate the forecasting ability of the MIDAS approach. (2) We extend the literature on the forecasting performance of trading volume to the GARCH‐MIDAS approach. (3) We present clear evidence to support that forecasting ability strongly relies upon data frequency. The empirical results show that: (1) GARCH‐MIDAS is not able to beat the traditional GARCH method when both are estimated by the same predictor sampled at different frequencies; (2) there is a positive relation between trading volume and volatility, but no clear evidence appears that SIAH holds in the China stock market; and (3) high‐frequency data are highly recommended for daily realized volatility (RV) forecasting, whereas intraday GARCH could significantly outperform traditional GARCH and GARCH‐MIDAS in volatility forecasting.