Using Volume to Forecast Stock Market Volatility around the Time of the 1929 Crash

Document Type

Article

Publication Date

9-24-2007

Publication Title

Applied Financial Economics

DOI

10.1080/09603100600794309

Abstract

This article explores the role of trading volume in making out-of-sample forecasts of stock market volatility around the time of the 24 October 1929 crash. Following the recent literature on volatility forecasting, we compare the performance of symmetric and asymmetric GARCH-class models. Moreover, as the volume–volatility relationship is now well established for modern day markets, we also consider the performance of these models when volume is allowed to enter the conditional variance equation. Given the institutional evidence that trading volume was beginning to take on an increasingly important role in the eyes of investors and market regulators during the last part of the 1920s, this is a particularly insightful endeavour. Generally speaking, the volatility models with trading volume provided the best volatility forecasts after ‘Black Thursday’.

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