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Testing the mixture-of-distributions hypothesis using “realized” volatility

✍ Scribed by James C. Luu; Martin Martens

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
163 KB
Volume
23
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

The mixture‐of‐distributions hypothesis (MDH) posits that price volatility and
trading 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 are
unobservable. Recent work (e.g., Andersen et al., 2001) suggests that
intraday returns can be used to construct estimates of daily return volatility that are more precise than those
constructed using daily returns. In a way, realized volatility becomes observable. Conducting a number of tests
of MDH we find that every conclusion based on the daily squared return is reversed when using realized
volatility based on intraday returns. Hence, the mixed evidence on MDH in the existing literature can in part be
attributed to the use of poor realized volatility measures. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark
23:661–679, 2003

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