Heteroscedasticity in stock returns data revisited: volume versus GARCH effects

Abstract

The results of Lamoureux and Lastrapes (Journal of Finance, 45, 221-29, 1990) are extended to the UK stock market, and the study examines, in particular, their finding that GARCH modelling captures the serial dependence in volume of trade. Using data on 50 UK companies, we find that although the parameter estimates of the GARCH model become insignificant when volume of trade is used in the conditional variance of returns, the autocorrelations of the squared residuals still exhibit a highly significant GARCH effects. Evidence is found that there is a strong association in the timing of innovational outliers in returns and volume. The results suggest that a threshold model for volume and returns could prove a useful route to pursue in future research.

Price–volume relations of DAX companies

“…However, one has to realize that the observation by Lamoureux and Lastrapes (1990) is mainly proof of the fact that trading volume and return volatility are driven by identical factors, leaving the question of the source of the joint process largely unresolved. This GARCH-cum-volume approach has been applied and extended in several studies, such as Lamoureux and Lastrapes (1994), Andersen (1996), Brailsford (1996, and Omran and McKenzie (2000), which occasionally contradict the earlier results by Lamoureux and Lastrapes (1990).…”

Empirical study on relationship between persistence-free trading volume and stock return volatility

“…Later, the similar results were obtained in different security markets of different countries or regions. For example, Brailsford (1996), Phylaktis, Kavussanos, and Manalis (1996), Sharma, Mougoue, and Kamath (1996), Omran and Mckednzie (2000), Soo, Lee and Nam (2000), Tarun Chordia and Bhaskaran Swaminathan (2000), Bohl andHenke (2001), Ramaprasad Bhar andShigeyuki Hamori (2004), Ho-Mou Wu and Wen-Chung Guo (2004) and etc. Some researchers further studied positive relationship between return variability and trading volume in terms of financial economy.…”

The impact of speculative trading activities on the speculative market: a case of Taiwan stock index futures market

“…There is an extensive literature on the relationship between futures trading activities and conditional return volatility (Butterworth, 2000;Omran and Mckenzie, 2000;Fung and Patterson, 2001;Kalotychou and Staikouras, 2006;Hadsell, 2006 and speculative trading activities on futures return or volatility is rarely mentioned in previous studies. Hedge and speculation are the two main techniques for futures trading activities.…”