The latent factor VAR model: Testing for a common component in the intraday trading process
AbstractIn this paper, we propose a framework for the modelling of multivariate dynamic processes which are driven by an unobservable common autoregressive component. Economically motivated by the mixture-of-distribution hypothesis, we model the multivariate intraday trading process of return volatility, volume and trading intensity by a VAR model that is augmentedby a joint latent factor serving as a proxy for the unobserved information flow. The model is estimated by simulated maximum likelihood using efficient importance sampling techniques. Analyzing intraday data from the NYSE, we find strong empirical evidence for the existence of an underlying persistent component as an important driving force of the trading process. It is shown that the inclusion of the latent factor clearly improves the goodness-of-fit of the model as well as its dynamical and distributional properties.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2005/03.
Length: 18 pages
Date of creation: Mar 2005
Date of revision:
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observation vs. parameter driven dynamics; mixture-of-distribution hypothesis; VAR model; efficient importance sampling;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: 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-2005-04-16 (All new papers)
- NEP-ECM-2005-04-16 (Econometrics)
- NEP-ETS-2005-04-16 (Econometric Time Series)
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