Premium
Volatility dynamics and heterogeneous markets
Author(s) -
McMillan David G.,
Speight Alan E. H.
Publication year - 2006
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.281
Subject(s) - volatility (finance) , economics , econometrics , speculation , realized variance , stochastic volatility , financial economics , macroeconomics
Abstract Recent research has suggested that intra‐day volatility may possess a component structure, resulting either from the arrival of heterogeneous information or the actions of heterogeneous market agents. This paper reports direct evidence for the existence of such components in S&P500 index and DM/$ exchange rate data. Estimation of a FIGARCH model supports the contention that volatility dynamics result from multiple sources. Using a HARCH conditional variance model which defines volatility components over differing time horizons, confirmatory evidence of heterogeneous components is reported, in which context the impact of high‐frequency speculation and noise‐trading are particularly apparent. Copyright © 2006 John Wiley & Sons, Ltd.