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Trading volume and the short and long-run components of volatility

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  • Liesenfeld, Roman

Abstract

This paper investigates the Information content of daily trading volume with respect to the long-run or high persistent and the short-run or transitory components of the volatility of daily stock market returns using bivariate mixture models. For this purpose, the Standard bivariate mixture model of Tauchen and Pitts (1983) in which volatility and volume are directed by one latent process of Information arrivals is generalized to the extent that two types of information processes each endowed with their own dynamic behavior are allowed to direct volatility and volume. Since the latent information processes are assumed to be autocorrelated which makes standard estimation methods infeasible, a simulated maximum Iikelihood approach is applied to estimate the mixture models. The results based on German stock market data reveal that volume mainly provides information about the transitory com-ponent of volatility, and contains only little information about the high persistent volatility component.

Suggested Citation

  • Liesenfeld, Roman, 1997. "Trading volume and the short and long-run components of volatility," Tübinger Diskussionsbeiträge 102, University of Tübingen, School of Business and Economics.
    • Handle: RePEc:zbw:tuedps:102
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    More about this item

    Keywords

    Volatility persistence; Bivariate mixture model; Long memory; Latent dynamic variables; Simulated maximum Iikelihood;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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