Predicting Bid-Ask Spreads Using Long Memory Autoregressive Conditional Poisson Models
AbstractWe introduce a long memory autoregressive conditional Poisson (LMACP) model to model highly persistent time series of counts. The model is applied to forecast quoted bid-ask spreads, a key parameter in stock trading operations. It is shown that the LMACP nicely captures salient features of bid-ask spreads like the strong autocorrelation and discreteness of observations. We discuss theoretical properties of LMACP models and evaluate rolling window forecasts of quoted bid-ask spreads for stocks traded at NYSE and NASDAQ. We show that Poisson time series models significantly outperform forecasts from ARMA, ARFIMA, ACD and FIACD models. The economic significance of our results is supported by the evaluation of a trade schedule. Scheduling trades according to spread forecasts we realize cost savings of up to 13 % of spread transaction costs.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2011-044.
Length: 46 pages
Date of creation: Jul 2011
Date of revision:
Bid-ask spreads; forecasting; high-frequency data; stock market liquidity; count data time series; long memory Poisson autoregression;
Other versions of this item:
- Axel Groß‐KlußMann & Nikolaus Hautsch, 2013. "Predicting Bid–Ask Spreads Using Long‐Memory Autoregressive Conditional Poisson Models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(8), pages 724-742, December.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-ECM-2011-07-21 (Econometrics)
- NEP-ETS-2011-07-21 (Econometric Time Series)
- NEP-FOR-2011-07-21 (Forecasting)
- NEP-MST-2011-07-21 (Market Microstructure)
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