Modelling High-Frequency Volatility and Liquidity Using Multiplicative Error Models
AbstractIn this paper, we study the dynamic interdependencies between high-frequency volatility, liquidity demand as well as trading costs in an electronic limit order book market. Using data from the Australian Stock Exchange we model 1-min squared mid-quote returns, average trade sizes, number of trades and average (excess) trading costs per time interval in terms of a four-dimensional multiplicative error model. The latter is augmented to account also for zero observations. We find evidence for significant contemporaneous relationships and dynamic interdependencies between the individual variables. Liquidity is causal for future volatility but not vice versa. Furthermore, trade sizes are negatively driven by past trading intensities and trading costs. Finally, excess trading costs mainly depend on their own history.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-047.
Length: 20 pages
Date of creation: Jul 2008
Date of revision:
Multiplicative error models; volatility; liquidity; high-frequency data;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-20 (All new papers)
- NEP-ECM-2008-07-20 (Econometrics)
- NEP-MST-2008-07-20 (Market Microstructure)
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SFB 649 Discussion Papers
SFB649DP2008-050, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Borak, Szymon & Weron, Rafal, 2008. "A semiparametric factor model for electricity forward curve dynamics," MPRA Paper 10421, University Library of Munich, Germany.
- Shiyi Chen & Kiho Jeong & Wolfgang K. Härdle, 2008. "Recurrent Support Vector Regression for a Nonlinear ARMA Model with Applications to Forecasting Financial Returns," SFB 649 Discussion Papers SFB649DP2008-051, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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