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A semi-Markov model for price returns

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  • Guglielmo D'Amico
  • Filippo Petroni
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    Abstract

    We study the high frequency price dynamics of traded stocks by a model of returns using a semi-Markov approach. More precisely we assume that the intraday return are described by a discrete time homogeneous semi-Markov process and the overnight returns are modeled by a Markov chain. Based on this assumptions we derived the equations for the first passage time distribution and the volatility autocorreletion function. Theoretical results have been compared with empirical findings from real data. In particular we analyzed high frequency data from the Italian stock market from first of January 2007 until end of December 2010. The semi-Markov hypothesis is also tested through a nonparametric test of hypothesis.

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    File URL: http://arxiv.org/pdf/1103.6143
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1103.6143.

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    Date of creation: Mar 2011
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    Publication status: Published in Physica A, 391, 4867-4876, 2012
    Handle: RePEc:arx:papers:1103.6143

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    Web page: http://arxiv.org/

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