Revisit of the volume versus GARCH effects by Univariate and Bivariate GARCH models: Evidence from US Stock Markets

Wing-Keung Wong¹, Jack H.W. Penm², and Zhuo Qiao³

Abstract

This paper tests for the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) effect on US stock markets for different periods, and re-examines the findings in Lamoureux and Lastrapes (1990) by using alternative proxies for information flow, which are included in the conditional variance equation of a GARCH model. We also examine the spillover effects of volatility, volume and turnover on the conditional volatility using a bivariate GARCH approach. Our findings show that the number of transaction clusters and the turnover have positive effects on conditional volatility and show that, using daily trading volume as a proxy for the mixing variable, the introduction of volume and/or turnover as exogenous variable(s) in the conditional variance equation eliminates the persistence GARCH effects as measured by the sum of the GARCH parameters. As a result of these inclusions, the GARCH effects completely vanish, and the persistence of volatility reduces in most cases. Our results reconfirm the significance of the volume effect on volatility to be very similar to the results found by Lamoureux and Lastrapes (1990) and others, suggesting that the earlier findings were not a statistical accident. Our findings also suggest that, unlike other anomalies, the volume effect on volatility is not likely to be eliminated after discovery. In addition, our findings reject the pure random walk hypothesis for the stock returns. Our bivariate analysis indicates that there is no volatility spillover effect and no volume or turnover spillover effects to the conditional volatility among the companies; this suggests that a company’s stock return volatility may not necessarily be influenced by the volume and turnover of other companies.

JEL classification: C13, G10, G14

Keywords: volatility, GARCH, volume, turnover, mixture of distributions hypothesis (MDH).

1. Corresponding author: Wing-Keung Wong, Department of Economics, National University of Singapore, 1 Arts Link, Singapore 117570. Tel : (65) 6874-6014, Fax : (65) 6775-2646. E-mail: ecswwk@nus.edu.sg

2. Faculty of Economics and Commerce, Australian National University

3. Department of Economics, National University of Singapore

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