Equity Trading Volume and Volatility: Latent Information Arrivals and Common Long-Run Dependencies

Abstract

This article examines the behavior of equity trading volume and volatility for the individual firms composing the Standard & Poor's 100 composite index. Using multivariate spectral methods, we find that fractionally integrated processes best describe the long-run temporal dependencies in both series. Consistent with a stylized mixture-of-distributions hypothesis model in which the aggregate “news”-arrival process possesses long-memory characteristics, the long-run hyperbolic decay rates appear to be common across each volume-volatility pair.

KEY WORDS:

• Fractional integration
• Mixture of distributions hypothesis
• Return volatility
• Spectral analysis
• Trading volume