The British Accounting Review Trading volume and volatility in the Boursa Kuwait

This paper presents the results of a study of the effect of daily trading volume on the persistence of time-varying conditional volatility for Kuwait Stock Exchange. The sample includes the market index, seven sectoral indices and 20 stocks. Whereas inclusion of contemporaneous volume in the equation of conditional variance does not reduce the persistence of volatility for the eight indices, this is not the case for individual companies. Furthermore, the lagged intraday volatility has higher predictive power for volatility than the lagged trading volume. These results lend further support to the mixture of distribution hypothesis at the level of firm, but not at the market and sectoral levels. These results indicate that trading volume is a poor proxy for information arrival to the market. These results are similar to those reported by Arago and Nieto (2005) who examined the persistence of volatility in the return of nine indices of nine international stock exchanges, including S&P 500 and NASDAQ, Wang et al. (2005) for the indices of Chinese stock market, and Alsubaie and Najand (2009) who examined the effect of inclusion of contemporaneous trading volume in the conditional variance equation of the market and industrial indices of Saudi Arabia. evaluate persistence Panel contains to provide a basis for comparison of the GARCH models trading The coefficient estimates and t provide strong evidence that daily stock returns can be characterized by volatility clustering effects in all cases. The degree of persistence of volatility as measured by the of the parameters 𝛼 1 and 𝛼 2 is very high, being over 0.90 in all cases, with the exception of one firm. As an example, take Firm 101, the coefficient for the previous shock is 0.197 and for its lagged variance is 0.747; both are highly significant at the 1 percent level. The sum of these coefficients is 0.944 which implies that the persistence in the volatility is very high. These results are similar to those reported by Alsubaie and Najand (2009) and by others examining stock returns in developed and emerging markets. the conditional volatility using Equation (7) which includes lagged PK instead of lagged volume. The sum of the ARCH and GARCH has declined for all indices, with smallest decline being 9.64 per cent for Services and the highest 40.62 per cent for Industrial, while the decline for the market was 14.34 percent. The average sum declined from 0.924 to 0.761 and the coefficient of the lagged Parkinson measure of volatility, as measured by Parkinson’s equation, is significant in all cases. The results of the Wilcoxon test (z = -2.521, significant at 0.012) show that there is a significant reduction in the sum of the coefficients of ARCH and GARCH after the inclusion of lagged trading volume. Moreover, the AIC shows an improvement of the model over the one without volume, with contemporaneous trading the persistence of correlated news process are a source of GARCH in the KSE and MDH provides a valid theoretical explanation in the Kuwaiti stock The findings of the study show while once the effects of (1980) measure of has more predictive power for forecasting the and is as as in explaining conditional volatility.