Return-Volume Dependence and Extremes in International Equity Markets

50 Pages Posted: 6 Aug 2003

See all articles by Terry Marsh

Terry Marsh

Quantal International Inc.

Niklas Wagner

Passau University

Date Written: May 2004

Abstract

This paper reconsiders return-volume dependence for the U.S. and six international equity markets. We contribute to previous work by proposing surprise volume as a new proxy for private information flow and apply extreme value theory in studying dependence for large volume and return, i.e. under situations of market stress. Results from a GARCH-M model indicate that surprise volume is superior in explaining conditional variance and reveals a positive market risk premium. Under conditions of market stress, the return-volume dependence is weaker, albeit mostly significant. The results for the U.S. market are most pronounced in that surprise volume explains ARCH- as well as leverage-effects and, under market stress, the return-volume dependence remains significant and symmetric. For the European and Asian markets, however, the dependence is weaker with asymmetry under market stress, i.e. small minimal returns show lower volume dependence than large maximal returns. We argue that our results are more consistent with a Gennotte and Leland (1990) misinterpretation hypothesis for market crashes than with cascade or behavioral explanations which associate high volume with steep price declines.

Keywords: trading volume, return-volume dependence, mixture of distribution hypothesis, extreme returns, bivariate extremal dependence, market crashes

Suggested Citation

Marsh, Terry and Wagner, Niklas F., Return-Volume Dependence and Extremes in International Equity Markets (May 2004). Available at SSRN: https://ssrn.com/abstract=424926 or http://dx.doi.org/10.2139/ssrn.424926

Terry Marsh

Quantal International Inc. ( email )

Two Embarcadero Center
8th Floor
San Francisco, CA 94111
United States
415-744-5301 (Phone)

HOME PAGE: http://www.quantal.com

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany