Modelling microstructure noise with mutually exciting point processes
AbstractWe introduce a new stochastic model for the variations of asset prices at the tick-by-tick level in dimension 1 (for a single asset) and 2 (for a pair of assets). The construction is based on marked point processes and relies on mutually exciting stochastic intensities as introduced by Hawkes. We associate a counting process with the positive and negative jumps of an asset price. By suitably coupling the stochastic intensities of upward and downward changes of prices for several assets simultaneously, we can reproduce microstructure noise (i.e. strong microscopic mean reversion at the level of seconds to a few minutes) and the Epps effect (i.e. the decorrelation of the increments in microscopic scales) while preserving standard Brownian diffusion behaviour on large scales. More effectively, we obtain analytical closed-form formulae for the mean signature plot and the correlation of two price increments that enable us to track across scales the effect of the mean-reversion up to the diffusive limit of the model. We show that the theoretical results are consistent with empirical fits on futures Euro--Bund and Euro--Bobl in several situations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 13 (2013)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.tandfonline.com/RQUF20
Other versions of this item:
- E. Bacry & S. Delattre & M. Hoffmann & J. F. Muzy, 2011. "Modeling microstructure noise with mutually exciting point processes," Papers 1101.3422, arXiv.org.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luc, BAUWENS & Nikolaus, HAUTSCH, 2006.
"Modelling Financial High Frequency Data Using Point Processes,"
Discussion Papers (ECON - DÃ©partement des Sciences Economiques)
2006039, Université catholique de Louvain, Département des Sciences Economiques.
- Luc Bauwens & Nikolaus Hautsch, 2007. "Modelling Financial High Frequency Data Using Point Processes," SFB 649 Discussion Papers SFB649DP2007-066, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- BAUWENS, Luc & HAUTSCH, Nikolaus, . "Modelling financial high frequency data using point processes," CORE Discussion Papers RP -2123, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- BAUWENS, Luc & HAUTSCH, Nikolaus, 2006. "Modelling financial high frequency data using point processes," CORE Discussion Papers 2006080, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Diebold, Francis X. & Strasser, Georg H., 2008.
"On the correlation structure of microstructure noise in theory and practice,"
CFS Working Paper Series
2008/32, Center for Financial Studies (CFS).
- Francis X. Diebold & Georg H. Strasser, 2008. "On the Correlation Structure of Microstructure Noise in Theory and Practice," PIER Working Paper Archive 08-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Vetter, Mathias & Podolskij, Mark, 2006.
"Estimation of Volatility Functionals in the Simultaneous Presence of Microstructure Noise and Jumps,"
2006,51, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
- Mark Podolskij & Mathias Vetter, 2007. "Estimation of Volatility Functionals in the Simultaneous Presence of Microstructure Noise and Jumps," CREATES Research Papers 2007-27, School of Economics and Management, University of Aarhus.
- Jean Jacod & Yingying Li & Per A. Mykland & Mark Podolskij & Mathias Vetter, 2007. "Microstructure Noise in the Continuous Case: The Pre-Averaging Approach - JLMPV-9," CREATES Research Papers 2007-43, School of Economics and Management, University of Aarhus.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.