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Wealth, volume and stock market volatility: case of Hong Kong (1993–2001)

This article attempts to answer the question of whether the gain and loss in property market speculations and rate of information flow play a significant role in stock market volatility in Hong Kong. To test for our wealth–volume–volatility hypothesis, two different measures of volatility: absolute (absolute value of SD from mean with monthly dimension) and conditional (EGARCH) are used and results are compared. In both measures, we find evidence of a statistical presence of a wealth effect on stock market volatility, particularly in the investment of luxury class of property in Hong Kong. To account for this result, we apply the prospect theory, house money effect and the newly developed conditional confidence theory. Although we fail to establish a volume–volatility relationship in our estimation, we offer additional dimensions to the explanation of our observation.