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Markets change every day: Evidence from the memory of trade direction

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  • Axioglou, Christos
  • Skouras, Spyros
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    Abstract

    We present empirical evidence that there are periodic, specifically daily, structural breaks in the trade direction time series process, a fact with implications for several key intra-day characteristics of markets. We suggest that breaks arise as a consequence of daily variation in order flow direction independently of intra-day events and as a consequence of a natural and widespread daily periodicity in the timing of investment decisions. Empirical implementation of our short memory AR model with daily level shifts captures the striking long horizon predictability of trade direction, performs better out-of-sample than the standard long memory ARFIMA alternative and is computationally easier to estimate.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 18 (2011)
    Issue (Month): 3 (June)
    Pages: 423-446

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    Handle: RePEc:eee:empfin:v:18:y:2011:i:3:p:423-446

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    Web page: http://www.elsevier.com/locate/jempfin

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    Keywords: Trade direction Long memory Structural breaks;

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    Cited by:
    1. Martin D. Gould & Mason A. Porter & Stacy Williams & Mark McDonald & Daniel J. Fenn & Sam D. Howison, 2010. "Limit Order Books," Papers 1012.0349, arXiv.org, revised Apr 2013.

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