The Public and Private Information Sources of Volatility

Abstract

We study the impact of public and private information on prices and volatility in financial markets. Previous studies demonstrate that public information, such as macroeconomic news releases, significantly affects both prices and volatility, while information that is distributed asymmetrically across participants, and thus privately held, affects prices. However, research on the impact of private information on volatility is scarce. We investigate this link using a high-frequency data set of the 30 year U.S. Treasury bond futures. Furthermore, we contribute to the analysis of information effects on returns and propose a model that simultaneously estimates the effects of public and private information on both prices and volatility. We find that private information variables such as order flow and bid-ask spread are statistically and economically significant explanatory variables for volatility. Our results imply that private information should not be ignored in volatility modeling for, e.g., risk management