This dissertation consists of four papers that examine various aspects of the temporal patterns in the volatility of asset returns. The first paper compares the predictive performance of various parametric ARCH models. We find that ARCH models are generally good descriptions of the timevarying volatility of UK stock returns. There appears to be asymmetry in the conditional volatility, although no single model outperforms the rest in all instances. In the second paper, we uncover evidence of asymmetric predictability in the conditional variance of firms of different size. Large firms shocks affect the future volatility of small firms, but not vice versa. We also find that trading period shocks have a significant impact on future volatility, but not nontrading period shocks. In the third paper, we document a contemporaneous volatility-volume relationship. We find that volatility is related to change in trading volume, and we propose a conditional volatility model that incorporate this contemporaneous volatility-volume relationship. In the final paper, we examine the various method of adjusting for nontrading effects in ARCH models, and we propose a new diagnostic test to detect the validity of such adjustments. We also uncover evidence that conditional volatility increases prior to market closure, but declines after market opening.

This paper investigates both the information contents of recommendations disseminated by foreign security firms and the interaction of foreign security firms’ trading activities with their recommendations in Taiwan’s stock market. Using event study, correlation test, and regression analysis, we find negative average abcdrmal returns(AARs) and average cumulative abcdrmal returns(CARs) for negative and neutral foreign analysts’ recommendations levels and recommendation changes in the pre-recommendation period. AARs and CARs for positive recommendations in pre-recommendation period are positive, but reverse to negative three days after the event day. Our results also show that correlation coefficients of recommendations (both in recommendation levels and recommendation changes) and holding period returns are significantly positive in the pre-recommendation period, but insignificantly negative in the post-recommendation period. In the regression analyses, we find that price momentum factor is significantly related to foreign analysts’ recommendation, but the incremental contribution of this factor to foreign analysts’ recommendations are marginal and not significant. We also find that foreign security firms respond more rigorously to stocks receiving recommendation above buy recommendations and stocks being downgraded. These results show that foreign security firms are more conservative toward trading stocks in Taiwan’s stock market. They only buy stocks above buy recommendations (in a delay pattern), but immediately sell downgraded stocks.

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