Relative effect of MDH versus SIAH: Application on the BVMT's securities

Abstract

The study of the relationship between volumes and volatility is particularly preferred because the nature of this relationship is still unknown. We therefore propose a presentation of the main works relating to the interactions between volumes and volatility, the analyzes being grouped into two major theoretical currents. In the context of information flow theory, a positive instantaneous relationship is postulated between volume and volatility, which underlies an instantaneous price adjustment to information. This theory is named "Mixture Distribution Hypothesis" known by the abbreviation MDH. In contrast, other works have contributed to the emergence of the second current by advancing the hypothesis of a gradual adjustment of prices to information because of the heterogeneity of expectations. In this context, a causal relationship of volume to volatility, and vice versa, is favored to the detriment of an instantaneous link. The latter is called "Sequential Informational Arrival Hypothesis" known as SIAH. The results of this study, conducted on intraday observations of securities listed on the B.V.M.T failed to support the "SIAH" and highlighted the importance of the "MDH" in the explanation of the relationship volume - volatility.