Effects of Trading Volume and Transaction Frequency on the Volatility of the Korean Bond Futures Market

This study investigates the relationship between return volatility and trading volume (or transaction frequency) as a proxy variable for information arrival. For this purpose, we employ daily price returns, trading volume and transaction frequency generated by 30-minute time segments in the Korean treasury bond (KTB) futures market. Including trading volume in the GARCH model reduces the persistence of conditional variances, suggesting that trading volume is a useful innovation for explaining the persistence of return volatility in the KTB Futures market. This finding provides support for the mixture of distributions hypothesis (MDH) that return volatility and trading volume are influenced by the same underlying flow of latent information to markets. In particular, we find that transaction frequency is a good substitute variable for explaining the persistence of return volatility as a proxy for information arrival for the KTB Futures market.