ABSTRACT
The non-normality of security price returns has attracted a large number of studies. The observed distributions are commonly called leptokurtic because of the narrower body of the distribution and fatter tails. One explanation suggested for the leptokurtosis in speculative market prices is the serial correlation in the time series of absolute or squared returns. This assertion, however, cannot explain the determinants behind these dynamic dependencies. An approach for rationalizing the strong contemporaneous correlation in price series is provided by the MDH (mixture of distributions hypothesis) developed by Clark (1973), in which a stochastic time variable (operational time) as opposed to calendar time was subordinated to the price process, and this operational time can be approximated by a physically observed variable: trading volume (or number of trades). According to the MDH theory, price changes and trading volumes are driven by the same underlying latent information flow that influences the expectations of market practitioners to result in price volatilities.
