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Statistical Models for High Frequency Security Prices

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Author Info
Roel C.A. Oomen

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Abstract

This article studies two extensions of the compound Poisson process with iid Gaussian innovations which are able to characterize important features of high frequency security prices. The first model explicitly accounts for the presence of the bid/ask spread encountered in price-driven markets. This model can be viewed as a mixture of the compound Poisson process model by Press and the bid/ask bounce model by Roll. The second model generalizes the compound Poisson process to allow for an arbitrary dependence structure in its innovations so as to account for more complicated types of market microstructure. Based on the characteristic function, we analyze the static and dynamic properties of the price process in detail. Comparison with actual high frequency data suggests that the proposed models are sufficiently flexible to capture a number of salient features of financial return data including a skewed and fat tailed marginal distribution, serial correlation at high frequency, time variation in market activity both at high and low frequency. The current framework also allows for a detailed investigation of the ``market-microstructure-induced bias'' in the realized variance measure and we find that, for realistic parameter values, this bias can be substantial. We analyze the impact of the sampling frequency on the bias and find that for non-constant trade intensity, ``business'' time sampling maximizes the bias but achieves the lowest overall MSE

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 77.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:77

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Related research
Keywords: Compound Poisson Process; High Frequency Data; Market Microstructure; Characteristic Function; OU Process; Realized Variance Bias; Optimal Sampling;

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Find related papers by JEL classification:
C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Econometric and Statistical Methods; Specific Distributions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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References listed on IDEAS
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Cited by:
(explanations, 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.)

  1. Jeffrey R. Russell & Federico M. Bandi, 2004. "Microstructure noise, realized volatility, and optimal sampling," Econometric Society 2004 Latin American Meetings 220, Econometric Society. [Downloadable!]
  2. Asger Lunde & Peter Reinhard Hansen, 2004. "Realized Variance and IID Market Microstructure Noise," Econometric Society 2004 North American Summer Meetings 526, Econometric Society. [Downloadable!]
  3. John M. Maheu & Thomas H. McCurdy, 2003. "News Arrival, Jump Dynamics and Volatility Components for Individual Stock Returns," CIRANO Working Papers 2003s-38, CIRANO. [Downloadable!]
    Other versions:
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