Abstract
This paper investigates the validation of the Mixture of Distributions Hypothesis (MDH) using trading volume and number of trades as contemporaneous proxies for information arrival in 15 sector indices of the Saudi Stock Exchange (Tadawul) using the TGARCH model. Findings provide strong evidence for the validity of the MDH for the Saudi market. Volatility persistence decreases when the trading volume and the number of trades are included in the conditional variance equation. The most striking finding is that contemporaneous number of trades is a better proxy for information arrival than trading volume, interacting with volatility in a manner anticipated under the MDH. This can be attributed to the unique characteristic of the Saudi equity market where only domestic investors are allowed to execute trade transactions. Further, the results reveal that the leverage effect was amplified, indicating a more pronounced asymmetric effect of bad news on volatility.
Highlights
This paper investigates the validation of the Mixture of Distributions Hypothesis (MDH) in the Saudi Stock Exchange (Tadawul)
They reported that volatility is best described by the TGARCH (1,1,1) asymmetric volatility model, using contemporaneous intraday volatility or trading volume as mixing variables, favoring the MDH against the Sequential Information Arrival Hypothesis (SIAH)
This paper tests the validity of the Mixture of Distributions Hypothesis in the Saudi Stock Exchange by exploring the use of contemporaneous trading volume and the number of trades as proxies for information arrival
Summary
There is a large body of literature on the relationship between trading volume and volatility of financial assets. For the Middle East and North Africa (MENA) region, Berna Okan, Onur Olgun, and Sefa Takmaz (2009) examined the relationship between volume and volatility for the Istanbul Stock Exchange (ISE)-30 futures index using daily data by applying GARCH, EGARCH and VAR models They reported findings consistent with Sequential Information Arrival Hypothesis (SIAH) and rejected the MDH for the ISE-30 futures index. Hisham Farag and Robert Cressy (2010) used daily return data for 43 Egyptian listed companies to investigate whether information arrived to market participants simultaneously as proposed by the MDH or sequentially as proposed by the SIAH They reported that volatility is best described by the TGARCH (1,1,1) asymmetric volatility model, using contemporaneous intraday volatility or trading volume as mixing variables, favoring the MDH against the SIAH. Their results supported the MDH at the firm level, as contemporaneous volume largely reduced the persistence of volatility
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