Surprise Volume and Heteroskedasticity in Equity Market Returns
40 Pages Posted: 17 Sep 2004 Last revised: 22 Aug 2008
Date Written: February 1, 2005
Abstract
Heteroskedasticity in returns may be explainable by trading volume. We use different volume variables, including surprise volume - i.e. unexpected above-average trading activity - which is derived from uncorrelated volume innovations. Assuming weakly exogenous volume, we extend the Lamoureux and Lastrapes (1990) model by an asymmetric GARCH in-mean specification following Glosten et al. (1993). Model estimation for the U.S. as well as six large equity markets shows that surprise volume provides superior model fit and helps to explain volatility persistence as well as excess kurtosis. Surprise volume reveals a significant positive market risk premium, asymmetry, and a surprise volume effect in conditional variance. The findings suggest that, e.g., a surprise volume shock (breakdown) - i.e. large (small) contemporaneous and small (large) lagged surprise volume - relates to increased (decreased) conditional market variance and return.
Keywords: ARCH, trading volume, return volume dependence, asymmetric
JEL Classification: C13, G10, G15
Suggested Citation: Suggested Citation
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