Journal
JOURNAL OF BANKING & FINANCE
Volume 35, Issue 7, Pages 1714-1726Publisher
ELSEVIER
DOI: 10.1016/j.jbankfin.2010.11.007
Keywords
Realized volatility; Fractional integration; Strongly autocorrelated; Bivariate mixture model; Long-range dependence
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We use fractionally-integrated time-series models to investigate the joint dynamics of equity trading volume and volatility. Bollerslev and Jubinski (1999) show that volume and volatility have a similar degree of fractional integration, and they argue that this evidence supports a long-run view of the mixture-of-distributions hypothesis. We examine this issue using more precise volatility estimates obtained using high-frequency returns (i.e., realized volatilities). Our results indicate that volume and volatility both display long memory, but we can reject the hypothesis that the two series share a common order of fractional integration for a fifth of the firms in our sample. Moreover, we find a strong correlation between the innovations to volume and volatility, which suggests that trading volume can be used to obtain more precise estimates of daily volatility for cases in which high-frequency returns are unavailable. (C) 2010 Elsevier B.V. All rights reserved.
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