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Volume and Volatility in a Common-Factor Mixture of Distributions Model

Published online by Cambridge University Press:  21 February 2014

Xiaojun He  and
Raja Velu
Xiaojun He
Affiliation:
xihe@yu.edu, Syms School of Business, Yeshiva University, 500 W 185th St, New York, NY 10033
Raja Velu
Affiliation:
rpvelu@syr.edu, Whitman School of Management, Syracuse University, 721 University Ave, Syracuse, NY 13244.
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Abstract

This paper develops a multi-asset mixture distribution hypothesis model to investigate commonality in stock returns and trading volume. The model makes two main predictions: First, the factor structures of returns and trading volume are independent although they stem from the same valuation fundamentals and jointly depend on a latent information flow; second, cross-sectional positive volatility-volume relations arise solely from the dynamic features of the information flow. Empirical analyses at the market level support these predictions. Furthermore, the results indicate that removing the information flow significantly reduces the return volatility persistence and the extent of the reduction exhibits a size pattern.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 1 , February 2014 , pp. 33 - 49
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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