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The Role of Liquidity Measures on Price Change Volatility: The use of GARCH framework on Copenhagen Stock Exchange

Krutii, Olga LU and Piranishvili, Nino LU (2014) NEKN02 20141
Department of Economics
Abstract
This paper is devoted to the actual questions beyond the liquidity-volatility relationship on Copenhagen Stock Exchange. The applied data set consists of daily index returns, turnover rates, proportional bid-ask spreads and illiquidity ratios over the period from 1 January 2009 to 31
December 2013 for the actively traded stocks comprised in the OMX C20 index. This study conducts the standard GARCH and asymmetric GARCH, namely Exponential GARCH(EGARCH) processes, to model the time-varying variance in the return series and then focuses on the inclusion of information arrival as proxied by the lagged liquidity measures. The empirical results for our sample show that turnover rate is strongly significant compared to other
representatives... (More)
This paper is devoted to the actual questions beyond the liquidity-volatility relationship on Copenhagen Stock Exchange. The applied data set consists of daily index returns, turnover rates, proportional bid-ask spreads and illiquidity ratios over the period from 1 January 2009 to 31
December 2013 for the actively traded stocks comprised in the OMX C20 index. This study conducts the standard GARCH and asymmetric GARCH, namely Exponential GARCH(EGARCH) processes, to model the time-varying variance in the return series and then focuses on the inclusion of information arrival as proxied by the lagged liquidity measures. The empirical results for our sample show that turnover rate is strongly significant compared to other
representatives of liquidity, suggesting its importance in explaining conditional volatility. We present the mixture of distributions hypothesis (MDH) which can intuitively explain the correlation between volatility and turnover rate by assuming that they both are driven by the same latent variable presenting the number of price-relevant news. This paper investigates if this hypothesis is applicable to our data set and whether the time-varying dependence of volatility and liquidity measures is compatible with MDH model. In compliance with results provided by Najand and Yung (1991), Foster (1995), Rahman et al. (2002), Worthington and Higgs (2003), Sabbaghi (2011) and on contrary to works of Lamoureux and Lastrapes (1990), Andersen (1996), Flemming and Kirby (2011), Louhichi (2011), it is found that persistence in volatility does not decrease significantly even after introducing turnover rate as the exogenous proxy for information arrival in the model. In addition, our results detect the exhibition of significant asymmetric volatility responses to flow of news into the market. (Less)
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author
Krutii, Olga LU and Piranishvili, Nino LU
supervisor
organization
course
NEKN02 20141
year
type
H1 - Master's Degree (One Year)
subject
keywords
turnover rate, proportional bid-ask spread, illiquidity ratio, the mixture of distributions hypothesis, persistence in volatility, leverage effect.
language
English
id
4468601
date added to LUP
2014-06-18 09:19:58
date last changed
2014-06-18 09:19:58
@misc{4468601,
  abstract     = {{This paper is devoted to the actual questions beyond the liquidity-volatility relationship on Copenhagen Stock Exchange. The applied data set consists of daily index returns, turnover rates, proportional bid-ask spreads and illiquidity ratios over the period from 1 January 2009 to 31 
December 2013 for the actively traded stocks comprised in the OMX C20 index. This study conducts the standard GARCH and asymmetric GARCH, namely Exponential GARCH(EGARCH) processes, to model the time-varying variance in the return series and then focuses on the inclusion of information arrival as proxied by the lagged liquidity measures. The empirical results for our sample show that turnover rate is strongly significant compared to other 
representatives of liquidity, suggesting its importance in explaining conditional volatility. We present the mixture of distributions hypothesis (MDH) which can intuitively explain the correlation between volatility and turnover rate by assuming that they both are driven by the same latent variable presenting the number of price-relevant news. This paper investigates if this hypothesis is applicable to our data set and whether the time-varying dependence of volatility and liquidity measures is compatible with MDH model. In compliance with results provided by Najand and Yung (1991), Foster (1995), Rahman et al. (2002), Worthington and Higgs (2003), Sabbaghi (2011) and on contrary to works of Lamoureux and Lastrapes (1990), Andersen (1996), Flemming and Kirby (2011), Louhichi (2011), it is found that persistence in volatility does not decrease significantly even after introducing turnover rate as the exogenous proxy for information arrival in the model. In addition, our results detect the exhibition of significant asymmetric volatility responses to flow of news into the market.}},
  author       = {{Krutii, Olga and Piranishvili, Nino}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Role of Liquidity Measures on Price Change Volatility: The use of GARCH framework on Copenhagen Stock Exchange}},
  year         = {{2014}},
}