High Frequency Financial Econometrics

In this paper, we propose a new econometric approach to jointly model the time series dynamics of the trading process and the revisions of ask and bid prices. We use this model to test the validity of certain symmetry assumptions very common among microstructure models. Namely, we test whether ask and bid quotes respond symmetrically to trade-related shocks, and whether buyer-initiated trades and seller-initiated trades are equally informative. In essence, the procedure we propose generalizes Hasbrouck's (1991) vector autoregressive model for signed trades and changes in the quote midpoint by relaxing the implicit symmetry assumptions in his model. The properties of the empirical model are derived from a structural dynamic model for ask and bid prices. In this model, ask and bid prices share a common lung-run component, the efficient price. The long-term value of the stock varies due to buyer-initiated shocks, seller-initiated shocks, and trade-unrelated shocks. The transitory components of ask and bid prices are characterized by two correlated and trade-dependent stochastic processes, whose dynamics are allowed to differ. The trading process is endogenous. Buyer and seller-initiated trades are generated by two idiosyncratic but mutually dependent stochastic processes. The generating processes of quotes and trades both depend on several exogenous variables that feature the trades and the market conditions.

Includes supplementary material: sn.pub/extras

Klappentext

This exciting volume presents cutting-edge developments in high frequency financial econometrics, spanning a diverse range of topics: market microstructure, tick-by-tick data, bond and foreign exchange markets and large dimensional volatility modelling. The chapters on market microstructure deal with liquidity, asymmetries of information, and limit order aggressiveness in pure limit order book markets. The chapters on tick-by-tick data present statistical techniques for the analysis of the discrete nature of price movements, the intraday seasonal patterns of financial durations, and the joint probability law of prices, volume and durations. Bond markets are brought into focus through the analysis of macroeconomic announcements in the future bond market as a function of the business cycle. Exchange markets are examined from two perspectives: the study of the impact of information arrival on exchange rate volatility and the uncovering of chartist patterns in the euro/dollar exchange rate. Last, dynamic modelling of large dimensional covariance matrices is also presented. Shedding light on some of the most relevant open questions in the analysis of high frequency data, this volume will be of interest to graduate students, researchers and industry professionals.

Inhalt
Editor's introduction: recent developments in high frequency financial econometrics.- Exchange rate volatility and the mixture of distribution hypothesis.- A multivariate integer count hurdle model: theory and application to exchange rate dynamics.- Asymmetries in bid and ask responses to innovations in the trading process.- Liquidity supply and adverse selection in a pure limit order book market.- How large is liquidity risk in an automated auction market?.- Order aggressiveness and order book dynamics.- Modelling financial transaction price movements: a dynamic integer count data model.- The performance analysis of chart patterns: Monte Carlo simulation and evidence from the euro/dollar foreign exchange market.- Semiparametric estimation for financial durations.- Intraday stock prices, volume, and duration: a nonparametric conditional density analysis.- Macroeconomic surprises and short-term behaviour in bond futures.- Dynamic modelling of large-dimensional covariance matrices.