A Discrete-State Continuous-Time Model of Financial Transactions Prices and Times

Jeffrey R Russell, Robert F Engle
2005 Journal of business & economic statistics  
Financial transaction prices typically lie on a discrete grid of values and arrive at random times. This paper proposes an econometric model with this structure. The distribution of each price change is a multinomial, conditional on past information and the time interval between the transactions. The proposed autoregressive conditional multinomial model is not restricted to be markov or symmetric in response to shocks, however such restrictions can be imposed. The duration between trades is
more » ... led as an ACD model following Engle and Russell (1998) . Maximum likelihood estimation and testing procedures are developed. The model is estimated with 12 months of tick data on a moderately frequently traded NYSE stock, Airgas. The preferred model is estimated with three lags for the ACM and two lags for the ACD. Both price returns and squared returns influence future durations and present and past durations affect price movements. The model exhibits reversals in transaction prices in the short run due to bid-ask bounce and clustering of large moves of either sign in the longer run. Evidence of symmetry in the dynamics of prices is presented, but the response to durations is clearly non-symmetric. It is found that the volatility per second of trades is highest for short duration trades and that expected returns are lower for longer duration trades.
doi:10.1198/073500104000000541 fatcat:q4fp3wyayzdljfstoc53upt6xi