Trading Volume and Market Volatility: Developed Versus Emerging Stock Markets

The Financial Review 42 (2007) 429--459
Trading Volume and Market Volatility:

Developed versus Emerging Stock Markets
Eric Girard∗
Siena College
Rita Biswas
University at Albany
Abstract
We investigate the relation between volatility and volume in 22 developed markets and 27
emerging markets. Compared to developed markets, emerging markets show a greater response
to large information shocks and exhibit greater sensitivity to unexpected volume. We find a
negative relation between expected volume and volatility in several emerging markets, which
can be attributed to the relative inefficiency in those markets. Previous research reports that the
persistence in volatility is not eliminated when lagged or contemporaneous trading volume is
considered. Our findings show that, when volume is decomposed into expected and unexpected
components, volatility persistence decreases.
Keywords: stock index returns, trading volume, emerging markets, volatility, TARCH
JEL Classification: G15
1. Introduction
The dynamic relation between stock market returns and various measures of
trading activity is the subject of considerable research. Some studies focus on the
∗ Corresponding author: School of Business, Siena College, Loudonville, NY 12211; Phone: (518) 783-
4133; Fax: (518) 782-6576; E-mail: egirard@siena.edu
Comments of two anonymous reviewers are gratefully acknowledged. This research is supported by the
Center for Global Financial Studies at Siena College.

C 2007, The Eastern Finance Association 429
430 E. Girard and R. Biswas/The Financial Review 42 (2007) 429–459
relation between stock returns and turnover while others examine the relation between
stock returns and trading volume. The current consensus is that a strong positive
relation exists between turnover and past returns with the degree of the association
varying across markets. The relation between stock returns and volume is not so clear.
While trading volume is positively linked to the absolute value of price changes, the
evidence linking trading volume and price changes is mixed. Subsequent research
examines the problem within the framework of the volatility of stock market returns
and, as Poon and Granger (2003, p. 505) comment, “the volume-volatility research
may lead to a new and better way for modeling returns distributions.”
Two basic approaches seek to explain the dynamics between trading volume and
the volatility of stock market returns. The first approach suggests that differences
in investor opinions and expectations are the source of changes in trading volume
and volatility and that such differences explain the dynamics between volume and
volatility. The second approach suggests that the manner in which information arrives
at the market determines trading volume and volatility. Irrespective of the approach,
the general consensus in the volume-volatility literature to date is that a strong link
exists between contemporaneous trading volume and conditional volatility. Given that
an understanding of this link might eventually lead to better volatility forecasting,
further exploration of this relation is worth pursuing. It is well known that volatility
forecasting is of interest to both academics and practitioners not only for investment
and security valuation purposes but also for risk management and monetary policy
making.1
This paper examines the relation between daily information flow (as measured
by trading volume) and the conditional volatility of stock index returns in 49 devel-
oped and emerging equity markets. The primary objective of our study is to compare
and contrast the relation between volume and volatility for developed versus emerging
markets. For this purpose, we decompose total volume into its expected and unex-
pected components to examine the role of differing trading systems on the relation
between trading volume and conditional volatility. Alternative trading systems across
developed and developing markets account for one of the reasons why the speed
of dissemination of new order flow information might differ across these markets.
Another objective is to provide evidence of the validity of some of the competing
theories put forth in the literature as explanations for the presence of GARCH effects
in stock price volatility from both developed and emerging markets.
Our empirical results first indicate that the effects of information shocks differ
between developed and emerging markets and are higher for the latter. The leverage
effect (of bad news) also differs across developed and emerging markets but is higher
for developed markets. Further, we observe that the sign and size of information
1 See Poon and Granger (2003) for a review of the entire body of finance literature on forecasting volatility in
financial markets, including a discussion on the significance of volatility forecasting for pricing derivative
securities and for obtaining more accurate VaR estimates.
E. Girard and R. Biswas/The Financial Review 42 (2007) 429–459 431
shocks have similar effects on conditional volatility in developed markets. However,

for emerging markets, the size of an information shock plays a more significant role.
Second, when total volume is included in the conditional variance specification,
volume is positively related to volatility but GARCH effects persist in all markets.
However, when volume is decomposed into its expected and unexpected components
and then included in the conditional variance specification, GARCH effects are re-
duced. Further, the positive relation between unexpected volume and volatility is
stronger in emerging markets compared to that in developed markets, and the volatil-
ity response to large information shocks is greater in emerging markets. Finally, we
find a negative relation between expected volume and volatility in several emerging
markets, suggesting that informed traders tend to lead the speculative trading activity
and drive bid-ask spreads higher, further diminishing the liquidity of those markets.
2. Prior research and testable implications

2.1. Differences in investor opinions and expectations
Poor empirical support for representative agent models led to the development of
rational expectations models with heterogeneous investors. Investors may be hetero-
geneous with respect to their investment opportunities or the information with which
they are trading. Under traditional asset pricing models with complete markets and
homogeneous investors, trading volume does not provide any significant information
about prices. According to Wang (1994), this is because in such models, with repre-
sentative agents, the specification of aggregate risk determines the optimal allocation
of assets, along with asset prices. With the advent of investor heterogeneity and in-
complete markets in asset pricing models, trading volume plays an important role
in influencing asset prices. Wang (1994) develops one such “rational expectations”
model, linking trading volume to stock price volatility under asymmetric informa-
tion. He finds a positive relation between trading volume and absolute changes in
stock prices but informed and uninformed investors behave differently in his model.
Further, Wang (1994) shows that investors trade rationally for both informational (to
speculate on future stock prices) as well as noninformational (in response to supply
shocks) reasons and this also leads to different dynamics between trading volume and
stock returns.
He and Wang (1995) develop a multi-period model with heterogeneous investors
and differential information. Investors have asymmetric private and public informa-
tion and trade competitively based on this asymmetry. Their model shows how, over
time, trading volume is closely related to the flow and nature of information in
the market. Further, while investors’ private information about equilibrium prices is
reflected in their trading, it is done with considerable noise. As a result, after in-
vestors first receive private information, they trade for several consecutive periods
in response to such private information. This, in turn, leads to the current trading
volume being related not only to the contemporaneous information flow but also to
the previously received private information. The implication is that trading volume is
serially correlated despite the information flow being independent over time.
Finally, He and Wang’s (1995) model provides a basis for why we would ex-
pect trading volume and the volatility of prices to be positively related. When new
information arrives in the market, not only do investors’ expectations about the value
of the stock change, but also the uncertainty about the value of the stock changes.
Consequently, the exogenous public information generates high volume in trading
as well as high volatility in stock prices. Existing private information, on the other
hand, generates high trading volume but not high price volatility as this type of prior-
information-based trading consists mostly of the unwinding of positions.
A third model linking stock price dynamics to trading volume was developed by
Harris and Raviv (1993). Their theory, often referred to as the Difference of Opinions
theory, assumes that investors are homogenous with respect to their prior beliefs
and the new information they receive. However, where investors differ from one
another is in their beliefs about the effect of new public information on asset prices.
The asymmetry in their interpretation of the common information drives investors to
speculative trading and this results in trading volume and absolute price changes being
positively correlated. However, in Harris and Raviv’s (1993) model, consecutive price
changes show negative serial correlation while trading volume demonstrates positive
correlation.
A fourth theory developed in the literature partially explains the positive relation
between trading volume and price movements and is based on traders’ heterogeneity
with respect to timing their trades. Admati and Pfleiderer (1988) provide evidence that
volume and price movements are clustered in time because traders who have the choice
of timing their trades at their discretion choose to trade when recent volume is large.
Their multi-period model assumes that traders are motivated by either information
or liquidity. All traders do not share the same information and informed traders
trade when they have some private information. On the other hand, liquidity or noise
traders are motivated by factors other than expected payoffs through future price
movements. For instance, some institutional traders may be trading due to liquidity
needs of their clients. However, the Admati and Pflieiderer (1988) model assumes
that irrespective of the trader’s motivation, both information and liquidity have some
discretion regarding the timing of their trades leading to endogenously determined
trading patterns. This strategic timing of trading partially explains the positive relation
between trading volume and the variability of stock returns.
2.2. Information-based models

The second broad approach of theories linking trading volume and stock returns
and volatility is to focus on the flow of information to the market. The first set
of theories shows that the time series of market returns is not drawn from a single
probability distribution but rather from a mixture of conditional distributions with
varying degrees of efficiency in generating the expected return. The autoregressive

“mixing variable,” considered to be the rate at which information arrives at the market,
explains the presence of GARCH effects in daily stock price movements. Further,
trading volume is considered the standard proxy for this “mixing variable.” This is the
Mixture of Distributions Hypothesis (MDH) used by Clark (1973) and more recently
by Lamoureux and Lastrapes (1990), among others, to link trading volume and stock
price volatility.
The empirical evidence on this linkage is abundant. Anderson (1996), Gallo and
Pacini (2000), Kim and Kon (1994), and Lamoureux and Lastrapes (1990) provide
support for this notion in U.S. stock markets while evidence is found in U.K. stock
markets by Omran and McKenzie (2000) and in Spanish stock markets by Zarraga
(2003). With respect to less developed markets, Pyun, Lee, and Nam (2000) provide
positive evidence from the Korean stock market, Bohl and Henke (2003) show support
from the Polish stock market, while Lucey (2005) finds mixed evidence for the MDH
in the Irish stock market.
The second set of information-based models, used by Copeland (1976, 1977)
and Jennings, Starks, and Fellingham (1981), assume asymmetric dissemination of
information. New information is disseminated sequentially to traders, and uninformed
traders cannot infer the presence of informed traders perfectly. Informed traders take
positions and adjust their portfolios accordingly, resulting in a series of sequential
equilibria before a final equilibrium is attained. This sequential dissemination of in-
formation from trader to trader is correlated with the number of transactions. Conse-
quently, new arrival of information to the market results not only in price movements
but also a rise in trading volume. Further, a rise in information shocks generates
increases in both trading volume and price movements.
2.3. Empirical evidence on developed versus emerging markets

Both the He and Wang (1995) model involving heterogeneous investors and the
Jennings, Starks, and Fellingham (1981) model imply that we should expect differ-
ences in the volume-volatility link between developed and emerging markets. The He
and Wang (1995) model theorizes that equilibrium prices reflect investors’ private
information based on which they trade, but it is assumed that equilibrium prices do
not fully do so—there is some noise in the process. Following this reasoning, in this
study we expect that the extent of noise will vary across markets. In particular, devel-
oped and emerging markets will differ with respect to the extent of noise, implying
that equilibrium prices in developed and emerging markets will differ in reflecting
traders’ private information and hence their trading. Further, we expect the extent
of noise to be relatively higher in emerging markets, with the implication that the
relation between expected trading volume and volatility will be weaker for emerging
markets.
In the Jennings, Starks, and Fellingham (1981) model, the sequential dissemina-
tion of information from trader to trader is what drives the volume of transactions as
well as the movements in prices due to trading by uninformed traders. Again, it is rea-
sonable to assume that developed and emerging markets will differ in the dissemina-
tion of information, hence one would expect to see differences in the volume-volatility
relation between these markets.
Studies have also documented differences in developed and emerging markets
with respect to the volume-volatility relation in the face of various shocks. Patel and
Sarkar (1998) present evidence of different responses to stock market crises between
developed and emerging markets. Using monthly returns on stock market indexes
of eight developed and 10 Asian and Latin American emerging economies between
1970 and 1997, Patel and Sarkar (1998) find that during crises in emerging markets,
stock prices decline more rapidly and steeply but recovery is slower.2
Previous research has also suggested that certain macro-level factors may influ-
ence stock volatility. Sabri (2004) uses monthly returns on emerging market indexes
spanning five regions between 1997 and 2000 to find that stock price changes are
most closely positively correlated with the stock trading volume and the exchange
rate. Sabri (2004) uses the backward multiple regression technique and concludes that
trading volume and exchange rates are the most predicting variables while inflation
is the least predicting variable of emerging stock price volatility.3
Basci, Ozyildinm, and Aygodan (1996) develop a stochastic model with restric-
tions on short sales and risk neutral agents having heterogeneous expectations. Data
collected from the Istanbul Securities Exchange during their sample period from
January 1988 to March 1991 fit their model’s institutional characteristics well. They
use weekly data from 29 individual stocks from the exchange to test the validity of
their model. In particular, they emphasize the excessive noise in both firm level and
macro-level information, implying that market prices may not be reflecting funda-
mentals. Thus, agents’ differing opinions may play a key role. They find that in such
an institutional setting typical of an emerging market, stock price levels and trading
volume are cointegrated, as predicted by their model.
2 Aggarwal, Inclan, and Leal (1999) analyze whether global or local events are responsible for causing
regime shifts in the volatility of emerging markets. Using an iterated cumulative sum of squares algorithm
to locate regime switching points, they then identify events that may be responsible for such shifts. They
find that local events, such as the Mexican peso crisis, the Marcos-Aquino conflict in the Philippines, etc.,
are responsible, with the global event of October 1987 being the only exception.
3 Longin and Solnik (1995) and Ramchand and Susmel (1998) use a slightly different approach to studying
the impact of shocks on market volatility. Using monthly data and a GARCH (1,1) model specification,
Longin and Solnik (1995) find that when shocks to the U.S. stock market are greater than the unconditional
U.S. market standard deviation, then the U.S. market’s correlation with several European developed markets
increases. Ramchand and Susmel (1998), on the other hand, use weekly data and a bivariate SWARCH
model to make cross-market correlations a function of the variance regime. They find that during a high
variance regime, U.S. markets are 2 to 3.5 times more correlated with other world stock markets compared
to a low variance regime.
Considerable evidence has been derived from developed stock markets. Crouch
(1970), Epps and Epps (1976), Cornell (1981), Grammatikos and Saunders (1986),
Harris (1986), Karpoff (1987), Chatrath, Ramchander, and Song (1996), and Malliaris
and Urrutia (1998) provide evidence of a positive relation between price changes and
volume for the U.S. equity markets. Gallant, Rossi, and Tauchen (1992) examine the
causal relation between S&P 500 stock index returns and trading volume in the NYSE
and find evidence of returns leading trading volume. Using data from stocks traded on
the NYSE, Gervais and Mingelgrin (2001) report that periods of high trading volume
tend to be followed by periods of positive excess returns whereas periods of low
volume tend to be followed by negative excess returns. These findings also suggest
that a positive relation exists between returns and trading volume and that volume
precedes returns.
Saatcioglu and Starks (1998) find similar evidence in emerging markets. They
use monthly data from six Latin American stock markets to test the relation between
price changes and volume, and find a positive price-volume relation and a causal rela-
tion from volume to stock price changes. Silvapulle and Choi (1999) use daily Korean
Composite Stock Index data to study the linear and nonlinear Granger causality be-
tween stock price and trading volume, and find a significant causality between the
two series. Ranter and Leal (2001) examine the Latin American and Asian financial
markets and find a positive contemporaneous relation between return and volume in
all of the countries in their sample except India. The authors also observe a causal
relation between return and volume. However, using the world’s nine largest national
stock market indexes, Chen, Firth, and Rui (2001) find mixed results of the causality
between price and volume. Similarly, Lee and Rui (2002) find little evidence to sup-
port the predictive power of trading volume for stock returns in four Chinese stock
exchanges.
Testing the volume-volatility relation for a number of actively traded stocks in
the United States, Lamoureux and Lastrapes (1990) use contemporaneous trading
volume as an explanatory variable in the variance equation and find that the inclusion
of volume eliminates the persistence in volatility. However, they suggest that adding
contemporaneous volume to the variance equation might cause a “simultaneity bias”
since volume is endogenous to the system. Therefore, they also use lagged volume
in the variance equation but it is found to be insignificant in most cases. On the other
hand, Najand and Yung (1991) perform a similar analysis using Treasury bond futures
and find that lagged volume explains volatility better than contemporaneous trading
volume. Chen, Firth, and Rui (2001) report that the persistence in volatility is not
eliminated when lagged or contemporaneous trading volume level is incorporated into
the GARCH model, a result contradicting the findings of Lamoureux and Lastrapes
(1990) with respect to the contemporaneous trading volume. Arago and Nieto (2005)
reexamine the results of Lamoureux and Lastrapes (1990) and argue that it is more
appropriate to split trading volume into two components: one considered “normal”
by the market and hence termed expected volume (EV) and the other motivated by the
unpredictable flow of information to the market, termed unexpected volume (UV).
Applying this logic, Arago and Nieto (2005) find that although the effects of the
UV on volatility are much greater than those of total volume, inclusion of UV in the
variance equation does not reduce the persistence of volatility or GARCH effects.
Finally, Bessembinder and Seguin (1993) also provide evidence of the positive
contemporaneous correlation between trading volume and volatility by decomposing
volume into two further components. They use endogenously determined open interest
as a proxy for trading activity and hypothesize that when open interest is large,
observed volatility, conditional on contemporaneous volume, will be lower. They also
investigate whether the effect of volume on volatility is homogeneous by separating
volume into expected and unexpected components. They find that unexpected positive
volume shocks produce larger effects on price volatility than negative shocks.
3. Data and methods

3.1. Data
The sample period of our study is from January 1, 1985 to June 30, 2005. Our data
set, which is the Datastream universe, comprises daily prices and volume activity in
49 equity markets—22 developed and 27 emerging markets, with the classification of
the markets based on the World Bank definitions and criteria. Following Chen, Firth,
and Rui (2001), we define trading volume as the daily number of shares traded. Data
are retrieved from Datastream and markets are included as data become available,
giving us as many as a maximum of 4,929 observations (Australia) and as little as
939 observations (Ireland) for the different countries in the sample.4
The daily index returns are calculated as the logarithmic first difference of the
stock price index. The hypothesis of a unit root is strongly rejected for the logarith-
mic first difference of the price index as evidenced by strongly significant ADF test
results.5 Therefore, stock returns series follow a stationary process. In addition, the re-
turn series are skewed and highly leptokurtic compared to the normal distribution. The
Ljung-Box Q(12) statistics (not reported in detail) for 12th order autocorrelations are
statistically significant, while the Ljung-Box test statistic Q2 (12) (for the demeaned
squared data) indicates the presence of conditional heteroskedasticity. These findings
suggest the use of GARCH modeling (Bollerslev, 1986), which allows for conditional
variance in the returns. Also, the General Error Density (GED) distribution may be
appropriate because of significant excess kurtosis and skewness (Arago and Nieto,
2005).
4 We retrieve all prices and volume traded for all markets available and each series corresponds to a stock
exchange—i.e., the U.S. series is the New York Stock Exchange, the Canadian series is the Toronto Stock
Exchange, etc.
5 TheAugmented Dickey Fuller (ADF) test for unit roots indicates that the series is I(0). The lag length is
chosen using the Akaike information criterion (AIC).
We detrend the trading volume time series by regressing the series on a deter-
ministic function of time. To allow for a nonlinear time trend and a linear time trend,
we use a quadratic time trend equation:
Volt = α + β1 t + β2 t 2 + εt , (1)
6
where Volt represents raw daily trading volume and t is time. In general, the co-
efficients for both the linear and quadratic terms are statistically significant. In the
following analysis, we will employ trading volume with linear and quadratic trends
removed for the 49 indexes. The detrended trading volumes are the residuals from
Equation (1).7
3.2. Methods
Following Glosten, Jagannathan, and Runkle (1993) and Zakoian (1994), we use
an asymmetric GARCH method known as Threshold GARCH or TARCH to model
stock return volatility. This model captures asymmetric characteristics, such as the
leverage effect, in which negative shocks have a greater effect on conditional volatility
than positive shocks of the same magnitude. The TARCH specification also captures
volatility clustering, i.e., when large (small) price changes tend to follow large (small)
price changes. Further, the TARCH model allows accounting for leptokurtosis and
skewness, both of which indicate departure from normality of the data, and both of
which are regarded as well-known characteristics of daily stock returns. Both TARCH
and exponential GARCH (EGARCH) are extensively used in the volume-volatility
literature. We conduct our tests using both methods to see whether differences in
results with previous studies are due to a different volatility model.
The Threshold GARCH (1,1) is:
R t = α + εt
(2)
σt2 = γ + ωεt−1
2
+ ηεt−1
2
dt−1 + ψσt−1
2
,
where R t is the realized return of the stock, expressed as a random walk process with
an error term of mean zero and conditional variance σ 2t . The conditional variance σ 2t
is specified as a function of the mean volatility γ , ε 2t−1 , which is the lag of the squared
residual from the mean equation (the ARCH term) and which provides news about
volatility clustering; σ 2t−1 , which is the last period’s forecast variance (the GARCH
6 The detrending could also have been done as in Griffin, Nardari, and Stulz (2007) who in turn follow Lo
and Wang (2000). They scale aggregate traded value by total market capitalization to form turnover and
then detrend the series by first taking its natural log and then subtracting its 20-week moving average.
7 ADF and KPSS tests suggest the absence of unit roots for the detrended volume series. In addition, the
detrended volume series display significant autocorrelations, which remain large for 12 lag periods (results
are available upon request). Significant autocorrelations in the volume series are also reported by Gallant,
Rossi, and Tauchen (1992) and Campbell, Grossman, and Wang (1993).
term) and finally, the term for capturing the asymmetry, ε 2t−1 dt−1 . The parameter
dt = 1 if ε t < 0, and 0 otherwise, so that good news (ε t > 0) and bad news (εt < 0)
are allowed to have different effects on the conditional variance. Good news has an
effect of ω, while bad news has an effect of ω + η. Accordingly, if η > 0, a leverage
effect exists, then bad news has greater effect than good news.
Unlike the linear GARCH model, there are no restrictions on the parameters ω,
η, and ψ to ensure nonnegativity of the conditional variance. Persistence of volatility
is measured by ψ—if ψ equals 1, current shocks persist indefinitely in conditioning
the future variance. It also represents the change in the response function of shocks
to volatility per period. A value greater than 1 implies that the response function of
volatility is explosive and a value less than unity implies that the response to volatility
shocks declines over time.
Due to the well-known nonnormality of the disturbance term (εt ), the distribution
is better approximated by the GED distribution. Under the GED assumption, T the log
of the likelihood function for t observations is represented by L(
) = t=1 I (
),
where
represents the set of parameters of the average and conditional variance to
be estimated with
ν
ε t ν
I (
)t = ln
− 0.5 − 1 + 1 ln(2) − ln 1 − 0.5 ln σt2 , (3)
λ σt λ ν ν
where λ = exp((− 1/ν) ln (2) + 0.5 ln ( (1/ν) − 0.5 ln ( (3/ν))), and ν is a tail-
thickness parameter. When ν is equal to 2, εt is normally distributed, while ν less
than 2 implies a fat-tailed distribution for εt .
In the next model, we extend the TARCH specification to investigate the volume-
volatility relation as suggested by Lamoureux and Lastrapes (1990). Under the MDH,
the variance of daily price increments is time varying and positively related to the rate
of daily information arrival. Accordingly, the unexpected price change in a day, ε t , will
be the sum of a number of intraday price changes. GARCH effects may be explained
as a manifestation of time dependence in the rate of evolution of intraday price
changes driven by new information arrival. Following earlier studies (for instance,
Arago and Nieto, 2005), we use daily trading volume as a proxy for the unobservable
new information arrival.
Assuming that the daily number of information arrivals is serially correlated,
Equation (2) can be modified as follows:
R t = α + εt
(4)
2
+ ηεt−1
2
dt−1 + ψσt−1
2
+ ζ0 Vt−1 ,
where V t−1 is the detrended trading volume. We use lagged volume for representing
contemporaneous volume to avoid the problem of simultaneity since lagged values of
endogenous variables are classified as predetermined (Harvey, 1989).8 As in the case

of Equation (2), Equation (4) is also estimated under the GED distribution assumption.
In this equation, ζ 0 should be positive and significant, and GARCH effects (ψ)
should disappear if volume is serially correlated and is a good proxy for the flow of
information to the market. In the case where trading activity does not fully capture the
rate of information arrival and other exogenous directing variables affect the variance
equation, GARCH effects, although reduced, will remain. We hypothesize that the
more efficient the trading system, the higher will be the information content of trading
volume, reflecting a higher level of transparency of transactions.
In the last model, we examine whether surprises in trading activity convey more
information and thus have a larger effect on return volatility than forecastable activity.
As mentioned earlier, trading volume, being serially correlated, is highly forecastable.
Accordingly, we apply ARMA(p,q) processes to partition activity into expected and
unexpected components as follows:
q
Vt = β1 Vt−i + δ j εt− j + ηDumt + εt , (5)
i=1 j=1
where V t is the observed volume at time t and “‘Dum” is a dummy variable that
p
controls
q for the day of the week. Thus, EV t , the EV at time t, is i=1 βi Vt−i +
j=1 δ j ε t− j + ηDum t , and UV t , the UV at time t, is the residual of Equation (5)
(εt ). As in Arago and Nieto (2005), our first forecast uses data for total daily volume
corresponding to the first six months. Following this, the ARMA models are estimated
using a moving window, which drops the first day of the series and introduces the
following day. Consequently, the ARMA model always uses information from the
immediately preceding six months. For each stock, we have series of daily volume,
EV and UV. To examine the effect of UV of information, we investigate an expanded
version of Equation (4):
R t = α + εt
(6)
2
+ ηεt−1
2
dt−1 + ψσt−1
2
+ ζ1 EV t−1 + ζ2 UV t−1 ,
where EV t−1 and UV t−1 represent the expected and unexpected components of volume
at t − 1, respectively. As in Equations (1) and (3), we use lagged variables as proxies
for contemporaneous volume to avoid the problem of simultaneity, and we estimate
Equation (6) under the GED distribution assumption.
8 In the same vein, Hiemstra and Jones (1994) find bidirectional nonlinear Granger causality between stock
returns and trading activity and provide further evidence of the importance of the information content of
lagged trading activity.
4. Results
Table 1 presents the results of selected parameters of the estimated TARCH model
without the inclusion of volume in the conditional variance.9 Panel A shows the results
for developed markets and Panel B shows the corresponding results for emerging
markets. We report the summary statistics of the coefficients for three different
subperiods (1988–1994, 1994–1999, and 1999–2005) to examine the robustness of our
results over time. Since the time series cover different time spans for different market
indexes, we present our results over subperiods common to all markets. Furthermore,
it is important to verify whether or not the estimated relations are stable over time,
especially for the longer time series. Finally, we need to evaluate the evolution of
each parameter throughout our sample period, since it is likely that emerging markets
have evolved over the 20-year span of our sample.10
The results show strong evidence that the daily index returns can be charac-
terized by a TARCH(1,1) model with GED distributed residuals. Since v is lower
than 2, the criterion for using the GED distribution is satisfied. Diagnostic tests on
the estimated standardized residuals indicate that the TARCH model is well spec-
ified.11 Even if TARCH log-likelihood values are slightly greater than those with
EGARCH, a likelihood ratio test suggests that we cannot ascertain which model is
better specified.12
The volatility persistence, measured by ψ, is generally quite high—it ranges from
0.74 (Luxembourg) to 0.935 (Finland) in developed markets and 0.488 (Sri Lanka)
to 0.901 (Turkey) in emerging markets—but it is less than 1, indicating stationary
persistence. Also, volatility persists more in developed markets (an average of 0.866
across 22 countries) as compared to emerging markets (an average of 0.794 across 27
countries). However, volatility persistence in emerging markets increases throughout
the subsamples from 0.715 during the 1988–1994 period to 0.805 during the 1999–
2005 period. Volatility persistence is quite stable for developed markets ranging from
0.857 in the first subsample to 0.885 in the last subperiod.
Interestingly, emerging markets are more responsive to larger size shocks or
volatility clustering (ω ranges from 0.032 in Brazil to 0.582 in Sri Lanka, and averages
0.159 across 27 markets) than developed markets (ω ranges between 0.017 in Ireland
9 First, the appropriate TARCH model is selected using AIC. Second, as we optimize a GED log likelihood,
we do not use the Quasi-Maximum Likelihood procedure of Bollerslev and Wooldridge (1992) to estimate
the standard errors. Instead, an iterative procedure is used based upon the method of Berndt-Hall-Hall-
Hausman (BHHH) to maximize the log-likelihood function. Finally, we also report the log-likelihood
values for the TARCH as well as for EGARCH(1,1)—a model that has often been used in similar studies.
10 We thank an anonymous reviewer for making this suggestion.
11 Estimated standardized residuals are defined as z t = ε̂t /σt ,where ε̂t is the residual from the TARCH
model and σ t is the estimated conditional standard deviation.
12 We conduct likelihood ratio tests for each country and results suggest insignificant differences between
TARCH and EGARCH. All EGARCH results are available from the authors.
Table 1
Volatility persistence without volume [TARCH(1,1)]
LL1 is the maximum log likelihood attained with the above TARCH model and LL2 is the maximum log likelihood that would have been obtained if EGARCH
was utilized. Q(12) and Q2 (12) are the Ljung-Box (1978) Q-statistics on the first 12 lags of the sample autocorrelation function of standardized residuals and the
squared standardized residuals, distributed as χ 2 (12) with 5% critical value of 21.03. “EN” is the joint test of sign and size of Engle and Ng (1993). It consists
in testing the null hypothesis of H0 : b1 = b2 = b3 = 0 in u 2t = a + b1 S − − + 2
t−1 + b2 S t−1 ε t −1 + b3 S t−1 ε t −1 + et , where u t are the squared standardized residuals,
+ −
ε2 t /σ 2 t , S−
t−1 is a dummy variable taking the value of one when ε t −1 is negative, and S t−1 = 1 – S t−1 . This is an F-test with 95% critical value of 2.60.
Panel A: Developed markets
1985:01 to 2005:06 ω η ψ ν LL1 LL2 Q(12) Q2 (12) EN
Australia 0.068∗∗∗ 0.078∗∗∗ 0.849∗∗∗ 1.381∗∗∗ 16,607 16,601 15.716 4.722 1.381
Austria 0.131∗∗∗ 0.039∗∗ 0.823∗∗∗ 1.183∗∗∗ 15,217 15,214 12.589 4.335 2.390
Belgium 0.109∗∗∗ 0.059∗∗∗ 0.839∗∗∗ 1.299∗∗∗ 15,985 15,992 21.806 4.370 0.025
Canada 0.071∗∗∗ 0.038∗∗∗ 0.889∗∗∗ 1.346∗∗∗ 17,570 17,562 13.933 5.278 0.787
Denmark 0.119∗∗∗ 0.008 0.853∗∗∗ 1.241∗∗∗ 11,522 11,504 17.704 3.882 0.122
Finland 0.060∗∗∗ 0.015 0.931∗∗∗ 1.408∗∗∗ 11,301 11,290 18.322 12.311 0.111
France 0.023∗∗∗ 0.087∗∗∗ 0.907∗∗∗ 1.514∗∗∗ 12,686 12,687 12.906 3.995 0.550
Germany 0.052∗∗∗ 0.090∗∗∗ 0.883∗∗∗ 1.388∗∗∗ 12,912 12,904 13.950 9.767 0.566
Hong Kong 0.044∗∗∗ 0.114∗∗∗ 0.860∗∗∗ 1.238∗∗∗ 11,517 11,510 19.535 12.123 0.277
Ireland 0.017 0.115∗∗∗ 0.861∗∗∗ 1.358∗∗∗ 2,920 29,17 19.150 14.749 0.938
Italy 0.054∗∗∗ 0.061∗∗∗ 0.893∗∗∗ 1.408∗∗∗ 13,755 13,751 15.371 9.119 0.009
Japan 0.040∗∗∗ 0.124∗∗∗ 0.877∗∗∗ 1.364∗∗∗ 11,065 11,056 14.503 12.082 1.559
Luxembourg 0.199∗∗∗ 0.043 0.741∗∗∗ 1.089∗∗∗ 4,331 4,327 10.446 2.049 1.729
The Netherlands 0.055∗∗∗ 0.073∗∗∗ 0.893∗∗∗ 1.484∗∗∗ 15,441 15,437 7.320 19.295 1.768
New Zealand 0.096∗∗∗ 0.025∗ 0.878∗∗∗ 1.399∗∗∗ 12,196 12,186 9.905 1.623 0.784
Norway 0.078∗∗∗ 0.084∗∗∗ 0.832∗∗∗ 1.318∗∗∗ 14,822 14,814 16.003 10.611 1.722
Singapore 0.106∗∗∗ 0.109∗∗∗ 0.802∗∗∗ 1.201∗∗∗ 15,435 15,432 18.177 15.303 0.200
Spain 0.051∗∗∗ 0.080∗∗∗ 0.878∗∗∗ 1.503∗∗∗ 11,239 11,237 18.260 2.917 1.150
E. Girard and R. Biswas/The Financial Review 42 (2007) 429–459
Sweden 0.047∗∗∗ 0.087∗∗∗ 0.888∗∗∗ 1.506∗∗∗ 14,550 14,553 18.634 15.176 1.264
Switzerland 0.041∗∗ 0.144∗∗∗ 0.840∗∗∗ 1.340∗∗∗ 12,774 12,770 4.334 17.628 0.486
United Kingdom 0.039∗∗∗ 0.072∗∗∗ 0.904∗∗∗ 1.548∗∗∗ 14,987 14,983 5.268 7.519 1.788
United States 0.022∗∗ 0.091∗∗∗ 0.916∗∗∗ 1.301∗∗∗ 16,316 16,298 9.999 3.549 1.929
441
(continued )
Table 1 (continued)
442
1985:01 to 2005:06 ω η ψ ν LL1 LL2
Average 0.069 0.074 0.865 1.355 12,961 12,956
Maximum 0.199 0.144 0.931 1.548 17,570 17,562
Minimum 0.017 0.008 0.741 1.089 2,920 2,917
Number of significant 21 19 22 22
Number of positive 22 22 22 22
Number of significant and positive 21 19 22 22
Summary per period: 1988:06–1994:05 (20 markets)

Average 0.058 0.074 0.857 1.312
Maximum 0.163 0.223 0.980 1.749
Minimum 0.004 −0.054 0.742 1.013

Average 0.065 0.075 0.859 1.550
Maximum 0.193 0.157 0.951 1.921
Minimum 0.010 0.003 0.739 1.301

Average 0.063 0.111 0.885 1.641
Maximum 0.261 0.209 0.991 2.186

Minimum 0.003 0.0002 0.779 1.059
(continued )
Table 1 (continued)
Panel B: Emerging markets
1985:01 to 2005:06 ω η ψ ν LL1 LL2 Q(12) Q2 (12) EN
Argentina 0.083∗∗∗ 0.108∗∗∗ 0.818∗∗∗ 1.248∗∗∗ 7,286 7,288 18.173 10.160 1.487
Brazil 0.032∗∗ 0.079∗∗∗ 0.869∗∗∗ 1.548∗∗∗ 3,933 3,933 18.219 11.396 1.799
Chile 0.175∗∗∗ 0.018 0.783∗∗∗ 1.577∗∗∗ 12,420 12,423 13.677 5.471 0.429
China 0.111∗∗∗ 0.048∗∗ 0.852∗∗∗ 1.225∗∗∗ 7,433 7,428 19.581 5.033 1.733
Colombia 0.415∗∗∗ −0.094 0.611∗∗∗ 0.933∗∗∗ 10,685 10,686 14.288 3.367 1.877
Czech Republic 0.116∗∗∗ 0.029 0.854∗∗∗ 1.391∗∗∗ 7,647 7,641 13.264 7.023 0.209
Greece 0.187∗∗∗ 0.021 0.795∗∗∗ 1.158∗∗∗ 11,496 11,492 17.312 4.284 1.152
Hungary 0.160∗∗∗ 0.035 0.781∗∗∗ 1.192∗∗∗ 8,605 8,607 11.062 3.475 2.238
India 0.098∗∗∗ 0.132∗∗∗ 0.752∗∗∗ 1.302∗∗∗ 6,539 6,543 15.385 9.787 1.529
Indonesia 0.168∗∗∗ 0.028 0.821∗∗∗ 1.119∗∗∗ 9,926 9,915 13.877 12.014 0.134
Israel 0.039∗∗ 0.113∗∗∗ 0.827∗∗∗ 1.269∗∗∗ 7,884 7,891 10.838 2.687 1.526
Korea 0.066∗∗∗ 0.055∗∗∗ 0.898∗∗∗ 1.436∗∗∗ 10,717 10,722 20.190 14.538 0.474
Malaysia 0.145∗∗∗ 0.133∗∗∗ 0.759∗∗∗ 1.167∗∗∗ 13,922 13,924 16.272 10.014 2.333
Mexico 0.044∗∗∗ 0.090∗∗∗ 0.889∗∗∗ 1.213∗∗∗ 11,929 11,931 10.213 13.805 0.959
Pakistan 0.186∗∗∗ 0.017 0.751∗∗∗ 1.063∗∗∗ 7,533 7,531 10.599 12.807 1.530
Peru 0.091∗∗∗ 0.067∗∗ 0.845∗∗∗ 1.004∗∗∗ 8,500 8,494 21.527 12.870 1.621
Philippines 0.120∗∗∗ 0.085∗∗∗ 0.794∗∗∗ 1.212∗∗∗ 10,733 10,736 9.670 4.747 1.655
Poland 0.097∗∗∗ 0.049∗∗ 0.849∗∗∗ 1.478∗∗∗ 6,704 6,708 16.507 15.288 1.520
Portugal 0.124∗∗∗ 0.055∗∗∗ 0.844∗∗∗ 1.194∗∗∗ 11,182 11,165 6.179 13.695 0.823
Romania 0.378∗∗∗ −0.017 0.661∗∗∗ 0.974∗∗∗ 4,740 4,733 11.688 2.287 1.484
Russia 0.140∗∗∗ 0.014 0.826∗∗∗ 1.268∗∗∗ 4,992 4,994 9.130 5.163 1.504
South Africa 0.114∗∗∗ 0.035∗ 0.821∗∗∗ 1.246∗∗∗ 11,547 11,547 4.954 5.482 1.502
Sri Lanka 0.582∗∗∗ −0.100 0.488∗∗∗ 0.907∗∗∗ 12,977 13,014 3.817 6.983 2.064
Taiwan 0.050∗∗∗ 0.073∗∗∗ 0.877∗∗∗ 1.2978∗∗∗ 8,513 8,514 13.443 12.645 0.843
Thailand 0.116∗∗∗ 0.068∗∗∗ 0.836∗∗∗ 1.289∗∗∗ 11,646 11,640 3.822 5.497 0.996
Turkey 0.120∗∗∗ −0.020 0.901∗∗∗ 1.347∗∗∗ 9,131 9,116 18.199 16.860 0.594
Venezuela 0.338∗∗∗ −0.075 0.648∗∗∗ 1.069∗∗∗ 8,726 8,712 1.984 7.134 1.356
443
(continued )
Table 1 (continued)
Panel B: Emerging markets 444
1985:01 to 2005:06 ω η ψ ν LL1 LL2
Average 0.159 0.039 0.795 1.227 9,161 9,160
Maximum 0.582 0.133 0.901 1.577 13,922 13,924
Minimum 0.032 −0.100 0.488 0.907 3,933 3,933

Average 0.216 0.002 0.715 1.214
Maximum 0.421 0.182 0.988 1.649
Minimum 0.006 −0.144 0.451 0.784

Average 0.145 0.038 0.757 1.278
Maximum 0.401 0.223 0.947 1.764
Minimum 0.023 −0.224 0.411 0.793

Average 0.108 0.054 0.805 1.358
Maximum 0.397 0.166 0.972 1.675

Minimum 0.012 −0.226 0.567 0.981
Number of significant significant 19 13 27 27
∗∗∗ , ∗∗ , ∗ indicate statistical significance at the 0.01, 0.05 and 0.10 level, respectively.
and 0.199 in Luxembourg, and averages 0.069 across 22 markets). However, volatility
clustering decreases from the first sample period (0.216) to the last sample period
(0.108).
Asymmetry is uniformly present in developed markets since η is found to be
consistently positive and statistically significant. This result is consistent with that
expected by the leverage effect as well as with the results found by other studies of
developed markets (see Arago and Nieto, 2005). As η averages 0.074 for developed
markets, it is as high as ω and it suggests that in developed markets, the direction
of the news is as important as its magnitude. Furthermore, the direction of shocks
becomes increasingly important throughout the sample (0.074 during 1988–1994 to
0.111 during 1999–2005). For emerging markets, only half of the countries show
significant and positive asymmetry. η marginally increases during each period and
only averages 0.039. This value is much lower than the average ω (0.159), indicating
that in emerging markets, the magnitude of news plays a more significant role than
its direction in influencing volatility.13
The results for when trading volume is included in the conditional variance
specification are reported in Table 2. Panel A shows the results for developed markets
and Panel B shows the corresponding results for emerging markets. As in Table 1, we
also report the summary statistics of the coefficients for the three different subperiods
(1988–1994, 1994–1999, and 1999–2005).
Not surprisingly, when the time dependence of volume is combined with the
persistence in volatility, the TARCH model reflects an uneven but persistent flow
of information to stock markets. Two interesting findings emerge from our results.
First, the coefficient of volume (ζ 0 ) is positive in most developed and emerging
markets (18 out of the 22 markets in Panel A, and 25 out of 27 markets in Panel B).
This observation is also true across the three subsamples for developed markets, and is
consistent with the literature. However, the coefficient of volume (ζ 0 ) is significantly
positive in only three developed markets out of four, and one emerging market out
of two. More importantly, this coefficient is not stable over time as it is found to be
significantly negative in a few emerging markets from 1988 to 1999.
Tauchen and Pitts (1983) examine this negative relation between volume and
volatility. They suggest that both volatility and trading volume are determined by new
information flow rates to the market, traders’ response to new information arrival
and the number of active traders. As a result, in thinly traded and highly volatile
emerging markets, infrequent trading can cause prices to deviate substantially from
fundamentals. The negative relation between volume and volatility for the emerging
markets is supported by the Sequential Information Hypothesis of Copeland (1976)
and Jennings, Starks, and Fellingham (1981). Indeed, it is more likely that in emerging
markets, dissemination of information is asymmetric and initially only well-informed
traders take positions. As information is sequentially transmitted from trader to trader,
13 As suggested by Shiller (1989), speculative bubbles resulting from noneconomic factors might be at the
origin of this observation.
Table 2
Volatility persistence with total trading volume [TARCH(1,1)] 446
was utilized. Q(12) and Q2 (12) are the Ljung-Box (1978) Q-statistics on the first 12 lags of the sample autocorrelation function of standardized residuals and the
squared standardized residuals, distributed as χ 2 (12) with 5% critical value of 21.03. “EN” is the joint test of sign and size of Engle and Ng (1993). It consists
in testing the null hypothesis of H0 : b1 = b2 = b3 = 0 in u 2t = a + b1 S − − + 2
t−1 + b2 S t−1 ε t−1 + b3 S t−1 ε t −1 + et , where u t are the squared standardized residuals,
2 2 − +
ε t /σ t , S t−1 is a dummy variable taking the value of one when ε t −1 is negative, and S t−1 = 1 – S − t−1 . This is an F-test with 95% critical value of 2.60.

1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2 Q(12) Q2 (12) EN
Australia 0.115∗ 0.081 0.847∗∗∗ 3.81∗∗∗ 1.478∗∗∗ 16,608 15,009 12.750 2.939 1.385
Austria 0.141∗∗∗ 0.056∗∗∗ 0.786∗∗∗ 30.20∗∗∗ 1.195∗∗∗ 15,225 15,223 19.603 4.798 0.336
Belgium 0.112∗∗∗ 0.057∗∗∗ 0.837∗∗∗ 2.99 1.301∗∗∗ 15,988 15,992 14.226 4.251 0.443
Canada 0.071∗∗∗ 0.039∗∗∗ 0.888∗∗∗ 0.16 1.347∗∗∗ 17,571 17,562 18.316 12.097 0.093
Denmark 0.125∗∗∗ 0.010 0.846∗∗∗ 4.76 1.244∗∗∗ 11,522 11,505 14.637 8.511 0.476
Finland 0.069∗∗∗ 0.011 0.923∗∗∗ 1.94∗∗∗ 1.417∗∗∗ 11,301 11,294 14.176 12.466 1.428
France 0.023∗∗ 0.087∗∗∗ 0.907∗∗∗ −0.04 1.514∗∗∗ 12,686 12,687 8.693 1.033 1.670
Germany 0.033∗∗ 0.110∗∗∗ 0.884∗∗∗ 0.31∗∗∗ 1.408∗∗∗ 12,923 12,915 20.604 18.396 1.098
Hong Kong 0.038∗∗∗ 0.129∗∗∗ 0.854∗∗∗ 0.09∗∗∗ 1.244∗∗∗ 11,523 11,516 16.898 9.171 0.978
Ireland 0.016 0.117∗∗∗ 0.859∗∗∗ 2.66 1.364∗∗∗ 2,921 2,918 3.273 16.850 0.005
Italy 0.044∗∗∗ 0.079∗∗∗ 0.889∗∗∗ 0.14∗∗∗ 1.420∗∗∗ 13,767 13,759 10.472 1.540 1.062
Japan 0.033∗∗∗ 0.141∗∗∗ 0.874∗∗∗ 0.085∗∗∗ 1.371∗∗∗ 11,070 11,060 16.557 10.213 0.579
Luxembourg 0.200∗∗∗ 0.043 0.739∗∗∗ −54.49 1.089∗∗∗ 4,331 4,327 13.502 4.679 0.209
The Netherlands 0.056∗∗∗ 0.070∗∗∗ 0.893∗∗∗ 0.18∗ 1.485∗∗∗ 15,442 15,439 12.828 5.867 0.043
New Zealand 0.103∗∗∗ 0.036∗∗ 0.854∗∗∗ 0.24∗∗ 1.405∗∗∗ 12,199 12,188 16.598 3.972 0.327
Norway 0.152∗∗∗ 0.093∗∗ 0.830∗∗∗ 5.75∗∗∗ 1.327∗∗∗ 14,827 14,240 11.435 3.797 1.935
Singapore 0.107∗∗∗ 0.132∗∗∗ 0.784∗∗∗ 0.37∗∗∗ 1.211∗∗∗ 15,439 15,436 21.506 10.752 1.516
Spain 0.046∗∗∗ 0.092∗∗∗ 0.866∗∗∗ 1.10∗∗∗ 1.527∗∗∗ 11,249 11,246 15.765 15.070 1.430
Sweden 0.046∗∗∗ 0.087∗∗∗ 0.889∗∗∗ −0.07 1.505∗∗∗ 14,550 14,553 21.331 1.275 1.055
Switzerland 0.041∗∗ 0.143∗∗∗ 0.840∗∗∗ −0.25 1.341∗∗∗ 12,774 12,770 7.186 6.608 1.187
United Kingdom 0.104∗∗ 0.078 0.898∗∗∗ 0.55∗∗∗ 1.601∗∗∗ 14,987 13,555 3.791 3.835 0.304
United States 0.078∗∗ 0.097 0.909∗∗∗ 0.77∗∗∗ 1.348∗∗∗ 16,317 14,514 17.410 15.637 0.428
(continued )
Table 2 (continued)
Volatility persistence with total trading volume [TARCH(1,1)]
1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2

Average 0.080 0.081 0.859 2.43 1.370 12,965 12,715
Maximum 0.200 0.143 0.923 57.58 1.601 17,571 17,563
Minimum 0.016 0.010 0.739 −54.98 1.089 2,921 2,918
Number of significant 21 16 22 14 22
Number of positive 22 22 22 18 22
Number of significant and positive 21 16 22 14 22

Average 0.078 0.096 0.828 5.09 1.388
Maximum 0.150 0.274 0.946 15.11 1.723
Minimum 0.0005 −0.064 0.731 −3.58 1.066

Average 0.076 0.109 0.842 2.65 1.529
Maximum 0.206 0.261 0.933 12.90 1.727
Minimum 0.009 0.005 0.744 −1.96 1.300
Number of sig and positive 11 13 20 13 20

Average 0.065 0.122 0.875 1.95 1.675

Maximum 0.260 0.274 0.975 12.60 2.193
Minimum 0.005 0.042 0.784 −0.03 1.059
447

(continued )
Table 2 (continued)
Volatility persistence with total trading volume [TARCH(1,1)] 448
1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2 Q(12) Q2 (12) EN

Argentina 0.069∗∗∗ 0.197∗∗∗ 0.726∗∗∗ 39.67∗∗∗ 1.288∗∗∗ 7,317 7,304 15.030 4.806 0.944
Brazil 0.031 0.132∗∗∗ 0.751∗∗∗ 7.94∗∗∗ 1.573∗∗∗ 3,934 3,938 15.093 4.777 0.298
Chile 0.176∗∗∗ 0.019 0.777∗∗∗ 0.09 1.578∗∗∗ 12,421 12,423 13.103 4.044 0.051
China 0.126∗∗∗ 0.065∗∗ 0.818∗∗∗ 0.17∗∗ 1.225∗∗∗ 7,435 7,432 12.805 9.435 0.073
Colombia 0.415∗∗∗ −0.094 0.612∗∗∗ −0.03 0.934∗∗∗ 10,685 10,686 19.355 11.076 0.031
Czech Republic 0.115∗∗∗ 0.034 0.848∗∗∗ 7.42 1.394∗∗∗ 7,649 7,641 19.467 14.016 0.023
Greece 0.189∗∗∗ 0.033 0.773∗∗∗ 18.51∗∗∗ 1.163∗∗∗ 11,503 11,497 9.194 0.298 0.783
Hungary 0.154∗∗∗ 0.038 0.786∗∗∗ 2.56 1.194∗∗∗ 8,607 8,608 16.328 16.305 0.062
India 0.067∗∗∗ 0.190∗∗∗ 0.695∗∗∗ 8.89∗∗∗ 1.349∗∗∗ 6,551 6,563 18.870 0.987 0.511
Indonesia 0.168∗∗∗ 0.029 0.820∗∗∗ 0.02 1.119∗∗∗ 9,927 9,915 16.797 16.262 1.093
Israel 0.044∗∗ 0.187∗∗∗ 0.693∗∗∗ 26.21∗∗∗ 1.346∗∗∗ 7,901 7,910 5.150 7.319 0.719
Korea 0.066∗∗∗ 0.056∗∗∗ 0.897∗∗∗ 0.03 1.437∗∗∗ 10,717 10,722 17.358 10.066 1.407
Malaysia 0.142∗∗∗ 0.212∗∗∗ 0.690∗∗∗ 2.52∗∗∗ 1.184∗∗∗ 13,940 13,942 20.091 3.738 0.979
Mexico 0.068∗∗∗ 0.091 0.882∗∗∗ 33.16∗∗∗ 1.264∗∗∗ 11,932 10,762 13.405 10.130 1.366
Pakistan 0.187∗∗∗ 0.010 0.757∗∗∗ −0.05 1.067∗∗∗ 7,533 7,531 15.550 10.274 0.467
Peru 0.096∗∗∗ 0.087∗∗∗ 0.819∗∗∗ 7.19∗∗∗ 1.011∗∗∗ 8,504 8,498 10.118 3.143 1.507
Philippines 0.138∗∗∗ 0.128∗∗∗ 0.691∗∗∗ 2.18∗∗∗ 1.265∗∗∗ 10,747 10,756 20.857 13.774 0.104
Poland 0.099∗∗∗ 0.072∗∗∗ 0.823∗∗∗ 29.11∗∗∗ 1.489∗∗∗ 6,705 6,712 14.341 10.161 2.314
Portugal 0.138∗∗∗ 0.002 0.840∗∗∗ 26.21∗∗∗ 1.256∗∗∗ 11,183 10,322 10.070 11.758 0.046
Romania 0.378∗∗∗ −0.017 0.660∗∗∗ 0.02 0.974∗∗∗ 4,740 4,733 8.144 13.734 0.668
Russia 0.163∗∗∗ 0.0156 0.784∗∗∗ 3.52∗∗∗ 1.278∗∗∗ 4,999 5,000 9.522 4.571 1.486
South Africa 0.114∗∗∗ 0.0442∗∗ 0.808∗∗∗ 1.02∗∗ 1.251∗∗∗ 11,550 11,549 5.408 13.530 0.187
Sri Lanka 0.557∗∗∗ −0.058 0.442∗∗∗ 0.52∗∗∗ 0.918∗∗∗ 12,987 13,026 5.193 4.676 0.924
Taiwan 0.045∗∗∗ 0.0895∗∗∗ 0.872∗∗∗ 0.07∗∗ 1.301∗∗∗ 8,517 8,517 2.748 5.344 1.796
Thailand 0.114∗∗∗ 0.0745∗∗∗ 0.833∗∗∗ 0.14 1.290∗∗∗ 11,648 11,641 17.702 13.343 0.424
Turkey 0.184∗∗ −0.014 0.896∗∗∗ 3.52 1.377∗∗∗ 9,131 7,805 2.337 6.563 0.614
Venezuela 0.346∗∗∗ −0.076 0.612∗∗∗ 12.70∗∗∗ 1.070∗∗∗ 8,727 8,714 3.021 13.476 0.595
(continued )
Table 2 (continued)
Volatility persistence with total trading volume [TARCH(1,1)]
1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2

Average 0.163 0.059 0.763 8.64 1.244 9, 166 9, 043
Maximum 0.557 0.212 0.897 39.67 1.578 13, 940 13, 942
Minimum 0.032 −0.094 0.442 −0.05 0.918 3, 934 3, 938

Average 0.185 0.048 0.696 23.21 1.283
Maximum 0.492 0.291 0.991 33.49 1.794
Minimum −0.012 −0.158 0.435 −5.22 0.789

Average 0.172 0.072 0.741 9.19 1.300
Maximum 0.495 0.332 0.947 22.22 1.805
Minimum 0.018 −0.225 0.427 −2.48 0.843

Average 0.117 0.085 0.791 4.92 1.440

Maximum 0.389 0.323 0.969 23.61 1.777
Minimum 0.003 −0.264 0.345 −1.23 0.996
449

less informed traders also take positions. After a series of intermediate transient
equilibria, a final equilibrium is reached resulting in lower volatility.
The second finding from Table 2 is that the volatility persistence coefficient
(ψ) is marginally reduced as compared to when volume was excluded from the vari-
ance equation. Specifically, in developed markets the coefficient ranges from 0.739
(Luxembourg) to 0.923 (Finland) and averages 0.859 (as compared to 0.865 without
volume). In emerging markets it ranges from 0.442 (Sri Lanka) to 0.897 (Korea) and
averages 0.763 (as compared to 0.795 without volume). Furthermore, this observa-
tion is stable as the volatility persistence also remains within each subperiod. Thus,
the inclusion of trading volume in conditional volatility does not reduce volatility
persistence. This finding is consistent with previous studies such as Chen, Firth, and
Rui (2001).
Surprises in trading activity convey more information and thus have a larger
effect on return volatility than forecastable trading activity. Accordingly, we now ex-
amine whether the expected and unexpected components of volume have different ef-
fects on the conditional variance by partitioning trading activity using an ARMA(p,q)
process specific to each index series and selected with the AIC criteria. The fitted
values of these models are used as the expected component while the forecast errors
are used as the unexpected component.
The Equation (6) results are in Table 3. Panel A shows the results for developed
markets and Panel B shows the results for emerging markets. For both developed and
emerging markets, we find that UV has a much greater effect on volatility than EV.
This result is consistent with Bessembinder and Seguin (1993) and Arago and Nieto
(2005).
Table 3, Panel A contains three major findings regarding the effects of UV
and EV in developed markets. First, the coefficient for EV is positive in 20 out of
22 developed markets with 15 of these coefficients being statistically significant.
This observation is consistent across each subperiod implying a positive relation
between volatility and EV in developed markets. Second, all 22 markets have positive
coefficients associated with UV and 20 of these are significant. This observation
is also consistent across each subperiod, again implying a positive relation between
volatility and UV in developed markets. Third, the coefficients associated with UV
are greater than those associated with EV, indicating that surprises in trading activity
convey more information than anticipated trading activity.
For emerging markets, UV has a greater effect on volatility than EV, implying
that surprises convey most of the information associated with trading volume in these
markets. The majority of the coefficients associated with UV are also positive for
each subperiod, but are much larger than the coefficients associated with EV, when
compared to what is observed in developed markets. Further, in emerging markets,
the coefficient associated with UV is almost 100 times the size of that associated
with EV during 1988–1994, while for developed markets, for the same subperiod,
the coefficient associated with UV is only five times the size of that associated with
EV. Not surprisingly, the range of the EV and UV coefficients is also much larger
Table 3
Volatility persistence with expected and unexpected trading volume [TARCH(1,1)]
was utilized. Q(12) and Q2 (12) are the Ljung-Box (1978) Q-statistics on the first 12 lags of the sample autocorrelation function of standardized residuals and
the squared standardized residuals, distributed as χ 2 (12) with 5% critical value of 21.03. EN is the joint test of sign and size of Engle and Ng (1993) consists in
testing the null hypothesis of H0 : b1 = b2 = b3 = 0 in u 2t = a + b1 S− − + 2
t−1 + b2 St−1 ε t −1 + b3 St−1 ε t −1 + et , where ut are the squared standardized residuals,
+ −
ε2 t /σ 2 t , S−
t−1 is a dummy variable taking the value of one when ε t −1 is negative, and St−1 = 1 – S t−1 . This is an F-test with 95% critical value of 2.60.
1985:01 to 2005:06 ω η ψ ζ 1 x 108 ζ 2 x 108 ν LL1 LL2 Q(12) Q2 (12) EN
Australia 0.074∗∗∗ 0.087∗ 0.801∗∗∗ 0.105∗∗ 10.42∗∗∗ 1.47∗∗∗ 16,621 16,380 19.95 4.061 0.225
Austria 0.139∗∗∗ 0.046 0.599∗∗∗ 18.923∗∗∗ 63.12∗∗∗ 1.20∗∗∗ 15,260 14,489 12.38 4.564 0.364
Belgium 0.109∗∗∗ 0.055∗∗∗ 0.839∗∗∗ 2.132∗∗∗ 25.31∗∗∗ 1.30∗∗∗ 15,999 16,002 18.97 9.672 0.004
Canada 0.167∗∗∗ 0.080∗∗∗ 0.716∗∗∗ 0.243∗∗∗ 2.53∗∗∗ 1.90∗∗∗ 17,595 17,428 13.50 11.05 0.994
Denmark 0.125∗∗∗ 0.012 0.841∗∗∗ 4.212∗∗∗ 40.87∗∗∗ 1.26∗∗∗ 11,541 11,518 17.32 8.823 0.179
Finland 0.068∗∗∗ 0.022∗∗∗ 0.512∗∗∗ 1.372∗∗∗ 26.17∗∗∗ 1.46∗∗∗ 11,311 10,896 11.81 5.340 0.154
France 0.167∗∗∗ 0.090∗∗∗ 0.721∗∗∗ −0.081 4.55∗∗∗ 1.58∗∗∗ 12,699 12,606 14.14 2.307 0.368
Germany 0.033∗∗ 0.110∗∗∗ 0.885∗∗∗ 0.029∗∗∗ 0.51 1.40∗∗∗ 12,924 12,915 11.90 5.579 0.717
Hong Kong 0.051∗ 0.121 0.816∗∗∗ 0.187∗∗∗ 8.91∗∗∗ 1.30∗∗∗ 11,577 10,330 11.91 2.071 1.464
Ireland 0.013 0.114∗∗∗ 0.869∗∗∗ 1.912∗∗ 18.45∗∗∗ 1.40∗∗∗ 2,926 2,922 6.900 5.846 0.696
Italy 0.036∗∗∗ 0.082∗∗∗ 0.895∗∗∗ 0.006 1.01∗∗∗ 1.44∗∗∗ 13,790 13,778 18.27 13.98 0.160
Japan 0.041∗∗ 0.131 0.846∗∗∗ 0.118∗∗∗ 7.71∗∗∗ 1.41∗∗∗ 11,121 10,074 13.48 4.718 0.829
Luxembourg 0.201∗∗∗ 0.041 0.741∗∗∗ 40.731 67.34 1.09∗∗∗ 4,331 4,328 12.48 3.702 0.125
The Netherlands 0.061∗∗∗ 0.073 0.620∗∗∗ 0.162∗∗ 9.44∗∗∗ 1.58∗∗∗ 15,477 14,669 18.74 14.60 0.305
New Zealand 0.099∗∗∗ 0.032∗∗∗ 0.641∗∗∗ 0.157 13.68∗∗∗ 1.48∗∗∗ 12,203 12,073 8.514 0.145 0.685
Norway 0.073∗∗∗ 0.096∗∗∗ 0.826∗∗∗ 0.227 5.56∗∗∗ 1.32∗∗∗ 14,829 14,822 15.47 15.84 0.263
Singapore 0.110∗∗∗ 0.115∗∗∗ 0.388∗∗∗ −0.009 5.76∗∗∗ 1.29∗∗∗ 15,505 15,196 10.34 1.210 0.571
Spain 0.058 0.090 0.622∗∗∗ 1.854 24.34∗∗∗ 1.54∗∗∗ 11,292 10,203 13.24 9.593 1.568
Sweden 0.051∗∗∗ 0.090 0.617∗∗∗ 0.393∗ 21.49∗∗∗ 1.59∗∗∗ 14,561 13,143 8.603 11.75 0.187
Switzerland 0.040∗∗ 0.140∗∗∗ 0.844∗∗∗ 0.136∗∗ 7.62∗∗∗ 1.35∗∗∗ 12,784 12,777 8.806 4.707 0.549
United Kingdom 0.039∗∗∗ 0.075 0.535∗∗∗ 0.023∗∗∗ 1.01∗∗∗ 1.60∗∗∗ 15,013 13,524 18.75 11.92 0.479
United States 0.030∗ 0.095 0.673∗∗∗ 0.062∗∗∗ 0.89∗∗∗ 1.36∗∗∗ 16,354 14,508 1.160 5.697 0.045
451
(continued )
Table 3 (continued)
Panel A: Developed markets 452

1985:01 to 2005:06 ω η ψ ζ 1 x 108 ζ 2 x 108 ν LL1 LL2
Average 0.081 0.082 0.720 2.51 16.67 1.42 12, 987 12, 481
Maximum 0.201 0.140 0.895 40.731 67.34 1.90 17, 596 17, 428
Minimum 0.013 0.012 0.388 −0.081 0.51 1.09 2, 926 2, 922
Number of significant 18 12 22 15 20 22
Number of positive 22 22 22 20 22 22
Number of significant and positive 18 12 22 15 20 22

Average 0.091 0.082 0.625 5.41 24.05 1.54
Maximum 0.161 0.149 0.966 11.29 52.17 1.76
Minimum 0.009 −0.079 0.259 −2.19 0.10 1.09

Average 0.085 0.064 0.673 1.65 6.385 1.54
Maximum 0.206 0.135 0.909 8.43 48.17 1.75
Minimum 0.006 0.025 0.511 −3.11 0.11 1.33

Average 0.097 0.097 0.741 1.26 7.648 1.70

Maximum 0.234 0.277 0.947 6.51 47.67 2.17
Minimum 0.009 0.034 0.394 −1.13 0.06 1.06
(continued )
Table 3 (continued)

1985:01 to 2005:06 ω η ψ ζ 1 x 108 ζ 2 x 108 ν LL1 LL2 Q(12) Q2 (12) EN
Argentina 0.085∗∗∗ 0.117∗∗∗ 0.438∗∗∗ 16.20∗∗ −52.02∗∗∗ 1.28∗∗∗ 7,290 7,152 12.02 3.476 1.028
Brazil 0.040∗∗∗ 0.088 0.730∗∗∗ −6.48∗∗ 504.00∗∗∗ 1.58∗∗∗ 3,953 3,916 13.07 8.932 0.037
Chile 0.176∗∗∗ 0.019 0.778∗∗∗ 0.16 1.90 1.57∗∗∗ 12,421 12,423 9.355 0.562 1.367
China 0.118∗∗∗ 0.055∗∗∗ 0.617∗∗∗ −0.29∗∗∗ 15.98∗∗∗ 1.24∗∗∗ 7,462 7,298 20.68 17.50 0.875
Colombia 0.415∗∗∗ −0.095 0.612∗∗∗ 0.23 −2.34 0.93∗∗∗ 10,686 10,686 3.774 15.90 0.118
Czech Republic 0.090∗∗∗ 0.039∗ 0.863∗∗∗ −21.43∗∗∗ 124.91∗∗∗ 1.45∗∗∗ 7,686 7,665 9.161 2.043 0.819
Greece 0.189∗∗∗ 0.033 0.772∗∗∗ 13.49∗∗ 311.88∗∗∗ 1.16∗∗∗ 11,505 11,498 16.67 3.804 0.199
Hungary 0.167∗∗∗ 0.039∗∗∗ 0.760∗∗∗ 28.43∗∗∗ 178.53∗∗∗ 1.22∗∗∗ 8,608 8,440 19.90 11.14 1.083
India 0.102∗∗∗ 0.134∗ 0.538∗∗∗ 11.55∗∗∗ 25.92∗∗∗ 1.36∗∗∗ 6,565 6,503 16.27 14.61 1.117
Indonesia 0.177∗∗∗ 0.037 0.828∗∗∗ −0.25∗∗∗ 14.01∗∗∗ 1.14∗∗∗ 9,961 9,929 20.62 0.944 0.532
Israel 0.034∗∗ 0.140∗∗∗ 0.797∗∗∗ −0.51 34.81∗∗∗ 1.36∗∗∗ 7,915 7,925 2.679 4.241 0.126
Korea 0.064∗∗∗ 0.057∗∗∗ 0.899∗∗∗ −0.48 0.96 1.43∗∗∗ 10,718 10,723 15.36 4.203 1.711
Malaysia 0.155∗∗∗ 0.134 0.439∗∗∗ 10.81∗∗∗ 24.63∗∗∗ 1.20∗∗∗ 14,066 13,301 14.01 7.561 1.327
Mexico 0.039∗∗∗ 0.100∗∗∗ 0.880∗∗∗ −2.64∗∗∗ 64.55∗∗∗ 1.23∗∗∗ 11,964 11,961 17.15 10.83 0.139
Pakistan 0.189∗∗∗ 0.026 0.591∗∗∗ 1.63∗∗ 71.41∗∗∗ 1.08∗∗∗ 7,542 6,558 18.55 −0.48 1.084
Peru 0.088∗∗∗ 0.094∗∗∗ 0.819∗∗∗ −3.24 108.44∗∗∗ 1.02∗∗∗ 8,509 8,502 15.98 15.74 0.534
Philippines 0.098∗∗∗ 0.119∗∗∗ 0.751∗∗∗ 0.84∗∗∗ 48.55∗∗∗ 1.31∗∗∗ 10,785 10,787 4.341 6.131 0.721
Poland 0.102∗∗∗ 0.050 0.756∗∗∗ 165.33 785.62∗∗∗ 1.54∗∗∗ 6,724 6,379 17.40 10.29 0.608
Portugal 0.130∗∗ 0.064 0.802∗∗∗ 1.66 37.92∗∗∗ 1.21∗∗∗ 11,189 10,145 18.71 3.173 0.538
Romania 0.381∗∗∗ −0.017 0.659∗∗∗ −0.17 0.40 0.97∗∗∗ 4,740 4,733 12.77 9.501 0.828
Russia 0.120∗∗∗ 0.020 0.828∗∗∗ −2.57∗∗∗ 18.71∗∗∗ 1.34∗∗∗ 5,035 5,031 15.56 10.72 1.003
South Africa 0.109∗∗∗ 0.039∗∗ 0.821∗∗∗ −0.36 28.65∗∗∗ 1.25∗∗∗ 11,553 11,551 18.83 13.30 0.330
Sri Lanka 0.588∗∗∗ −0.097 0.285∗∗∗ 0.86∗∗∗ −0.80∗∗∗ 0.93∗∗∗ 12,989 11,436 9.109 13.01 0.170
Taiwan 0.055∗ 0.076 0.519 ∗∗∗ 1.27∗∗∗ 55.55∗∗∗ 1.34∗∗∗ 8,544 7,890 4.419 12.62 0.114
Thailand 0.123∗∗∗ 0.075∗∗∗ 0.781∗∗∗ 1.12∗∗∗ 86.56∗∗∗ 1.35∗∗∗ 11,715 11,477 4.088 4.279 0.654
Turkey 0.130∗∗ −0.017 0.617 ∗∗∗ −0.11 0.27∗∗∗ 1.37∗∗∗ 9,158 7,840 2.341 5.348 1.439
Venezuela 0.332∗∗∗ −0.068 0.622∗∗∗ 11.57∗∗ 21.24∗∗∗ 1.07∗∗∗ 8,727 8,714 13.07 17.89 0.789
453
(continued )
Table 3 (continued)
Panel B: Emerging markets 454

1985:01 to 2005:06 ω η ψ ζ 1 x 108 ζ 2 x 108 ν LL1 LL2
Average 0.165 0.044 0.685 8.39 92.97 1.26 9, 186 8, 906
Maximum 0.588 0.140 0.899 165.33 785.62 1.58 14, 066 13, 301
Minimum 0.034 −0.097 0.285 −21.43 −52.02 0.93 3, 953 3, 916

Average 0.186 0.051 0.547 −1.76 92.01 1.32
Maximum 0.562 0.127 0.794 8.61 705.01 1.73
Minimum 0.023 −0.028 0.130 −21.54 −19.38 0.98

Average 0.156 0.062 0.636 35.0 168.30 1.38
Max 0.495 0.254 0.892 71.91 445.45 1.84
Min 0.002 −0.143 0.371 −35.54 −17.01 0.90

Average 0.122 0.067 0.639 8.50 29.40 1.54

Maximum 0.382 0.212 0.897 21.98 95.59 1.90
Minimum 0.014 −0.136 0.364 −8.91 −9.60 1.02
in emerging markets than in developed markets (92.97 versus 16.67 for the UV, and
8.39 versus 2.61 for EV).
Our findings are consistent with those implied by the He and Wang (1995)
model. That is, equilibrium prices do not fully reflect investors’ private information
on which they base their trades—there is some “noise” in the process. Since developed
and emerging markets differ with respect to the extent of “noise,” equilibrium prices
in developed and emerging markets differ in reflecting traders’ private information
and hence their trading. Furthermore, since the extent of noise is relatively higher
in emerging markets, the trading volume and volatility relation will be stronger in
emerging markets.
Another important difference between emerging and developed markets can
be observed with EV. In emerging markets, only 15 coefficients associated with
EV are positive, and only 11 of them are significant. The coefficients associated
with EV are negative in 12 markets and significant in six of them. Furthermore,
this negative relation between EV and volatility occurs in similar proportions across
the subperiods—a negative relation between volume and volatility is exhibited by
one market out of two from 1988 to 1994, two out of five from 1994 to 1999, and
approximately two out of five from 1999 to 2005. As Tauchen and Pitts (1983) suggest,
in liquid or mature markets, where the number of traders is large the relation between
trading volume and price volatility should be positive. However, the observed negative
relation between EV and volatility for some emerging markets can be explained by
thinly traded securities.14 As trading volume in the market increases, one would expect
more information to be available which, in turn, improves market transparency and
reduces uncertainty and market volatility.
In the final model, we also note that the volatility persistence coefficient (ψ) is
lower as compared to our earlier results. In developed markets, the coefficient ranges
from 0.338 (Singapore) to 0.895 (Italy) and averages 0.720 (as compared to 0.865
without volume). In emerging markets, the coefficient ranges from 0.285 (Sri Lanka)
to 0.899 (Korea) and averages 0.685 (as compared to 0.795 without volume). As a
result, when volume is decomposed into its expected and unexpected components,
14 In thinner markets, variance decreases with an increase in trades, and prices are adjusted through spec-
ulative trading. In many younger markets, transactions are made through a broker, based on negotiations
between parties. If the official price reporting mechanism is weak, brokers gather and process information
from market sources regarding transactions that have taken place in that market. This information is then
passed on to a trader (a buyer or seller). As is the case in emerging markets with their embryonic insider
trading laws, informed traders can lead to considerable losses on the part of market makers. Indeed, in
markets where a cluster of traders might have superior information relative to the market makers, the
incentive to market making is reduced and will lead to high spreads to avoid losing money to informed
traders. Because there is a well-established literature on the inverse relation between volume and spreads
(Abhyankar, Ghosh, Levin, and Limmack, 1997; Dey and Radhakrishna, 2007; and Cai, Hudson, and
Keasey, 2004), it makes sense that with no arrival of new information (EV) to all market traders, trading
will decrease and large shifts in prices might occur at the same time (through speculation on the part of
informed traders and the resulting increase of spreads on the part of market makers). Thus, in inefficient
markets, trading volume is expected to drop (but prices can still shift dramatically as a result of unexpected
news), implying a negative relation between EV and volatility of returns.
it conveys information and affects volatility in a manner weakly consistent with the
MDH.
5. Summary and conclusions

In this study, we have examined the interaction of volatility and volume in 49
equity indexes over January 1980 to June 2005. The study provides empirical support
for the TARCH specification for explaining the daily time dependence in the rate of
information arrival to the market for all stocks traded in the frontier market exchange.
Thus, using volume as a proxy for the flow of information, TARCH is found to be an
appropriate model to mimic the conditionality of second moments.
Based on a TARCH (1,1) model, we first find that the effect of volatility is
indeed different between developed and emerging markets and is higher for the latter.
The leverage effect of bad news also differs across developed and emerging markets
and is higher for developed markets. Furthermore, we observe that the sign and size
of information shocks have similar effects on conditional volatility in developed
markets. However, it seems that the size of an information shock is much more
important in emerging markets possibly due to the presence of noise trading and
speculative bubbles.
Second, when total volume is included in the conditional variance specification,
volume is positively related to volatility but GARCH effects persist in both developed
and emerging markets. However, when the volume is decomposed into its expected
and unexpected components and these terms are included in the conditional variance
estimation, GARCH effects are reduced. As a result, volume conveys information
and affects volatility in a manner weakly consistent with the MDH.
Third, emerging markets are found to have greater responses to larger shocks,
implying that the size of the news is more important than its direction. Also, emerg-
ing markets show a much stronger positive relation between UV and volatility. Both
of these findings suggest the presence of noise trading and speculative bubbles in
emerging markets. We also find a negative relation between EV and volatility in
several emerging markets, suggesting that informed traders tend to lead the specu-
lative trading activity and drive bid-ask spreads higher, further diminishing the liq-
uidity of the market. Given that official price reporting mechanisms and insider
trading laws are also relatively weaker in these countries, a change in local policies
to design better systems is warranted if foreign investors are to be attracted to these
markets.
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Trading Volume and Market Volatility: Developed Versus Emerging Stock Markets

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The Financial Review 42 (2007) 429--459

Trading Volume and Market Volatility:

JEL Classification: G15

shocks have similar effects on conditional volatility in developed markets. However,

2. Prior research and testable implications

2.2. Information-based models

varying degrees of efficiency in generating the expected return. The autoregressive

2.3. Empirical evidence on developed versus emerging markets

3. Data and methods

endogenous variables are classified as predetermined (Harvey, 1989).8 As in the case

Summary per period: 1988:06–1994:05 (20 markets)

Summary per period: 1994:06–1999:05 (20 markets)

Summary per period: 1999:06–2005:06 (22 markets)

Maximum 0.261 0.209 0.991 2.186

Summary per period: 1988:06–1994:05 (16 markets)

Summary per period: 1994:06–1999:05 (25 markets)

Summary per period: 1999:06–2005:06 (27 markets)

Maximum 0.397 0.166 0.972 1.675

Panel A: Developed markets

Panel A: Developed markets

1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2

Summary per period: 1988:06–1994:05 (20 markets)

Summary per period: 1994:06–1999:05 (20 markets)

Summary per period: 1999:06–2005:06 (22 markets)

Average 0.065 0.122 0.875 1.95 1.675

Number of significant and positive 12 18 22 16 22

1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2 Q(12) Q2 (12) EN

Panel B: Emerging markets

1985:01 to 2005:06 ω η ψ ζ 0 x 108 ν LL1 LL2

Summary per period: 1988:06–1994:05 (16 markets)

Summary per period: 1994:06–1999:05 (25 markets)

Summary per period: 1999:06–2005:06 (27 markets)

Average 0.117 0.085 0.791 4.92 1.440

Number of significant and positive 18 9 24 20 27

Panel A: Developed markets 452

Summary per period: 1988:06–1994:05 (20 markets)

Summary per period: 1994:06–1999:05 (20 markets)

Summary per period: 1999:06–2005:06 (22 markets)

Average 0.097 0.097 0.741 1.26 7.648 1.70

Panel B: Emerging markets

Panel B: Emerging markets 454

Summary per period: 1988:06–1994:05 (16 markets)

Summary per period: 1994:06–1999:05 (25 markets)

Summary per period: 1999:06–2005:06 (27 markets)

Average 0.122 0.067 0.639 8.50 29.40 1.54

5. Summary and conclusions

Shiller, J.R., 1989. Market Volatility (MIT Press, Cambridge, MA).

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