Modelling Price Movement and Trading Volume in Conditional Volatility

Abstract

This study investigates the relation between volatility in the returns and trading volume adjusted for overall up/down price movement in 59 stocks from the Australian market. Two proxies for rate of information arrival accommodating up/down price movement over the trading period and the non-trading period are introduced. These proxies when included in the variance equation of the GARCH(1,1) model tend to reduce persistence in volatility more than the contemporaneous and lagged trading volume. The overnight non-trading period downward price movement induced trading volume affect conditional volatility more than when the price movement is upward. When the overall price movement during the trading period is accommodated through trading volume the asymmetric effect due to up and down price movement on conditional volatility is opposite to what is observed with the overnight non-trading period case.