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Testing the mixture‐of‐distributions hypothesis using “realized” volatility
Author(s) -
Luu James C.,
Martens Martin
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10077
Subject(s) - unobservable , volatility (finance) , econometrics , economics , realized variance , forward volatility , volatility smile
The mixture‐of‐distributions hypothesis (MDH) posits that price volatility andtrading volume are both subordinated to the same information arrival rate or “news” process.Existing studies that test MDH have the problem that both the information arrival rate and volatility areunobservable. Recent work (e.g., Andersen et al., 2001) suggests thatintraday returns can be used to construct estimates of daily return volatility that are more precise than thoseconstructed using daily returns. In a way, realized volatility becomes observable. Conducting a number of testsof MDH we find that every conclusion based on the daily squared return is reversed when using realizedvolatility based on intraday returns. Hence, the mixed evidence on MDH in the existing literature can in part beattributed to the use of poor realized volatility measures. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark23:661–679, 2003