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Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models

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Author Info
Clive G. Bowsher () (Nuffield College, Oxford University)

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Abstract

A continuous time econometric modelling framework for multivariate financial market event (or 'transactions') data is developed in which the model is specified via the vector conditional intensity. This has the advantage that the conditioning information set is updated continuously in time as new information arrives. Generalised Hawkes (g-Hawkes) models are introduced that are sufficiently flexible to incorporate `inhibitory' events and dependence between trading days. Novel omnibus specification tests for parametric models based on a multivariate random time change theorem are proposed. A computationally efficient thinning algorithm for simulation of g-Hawkes processes is also developed. A continuous time, bivariate point process model of the timing of trades and mid-quote changes is presented for a New York Stock Exchange stock and the empirical findings are related to the market microstructure literature. The two-way interaction of trades and quote changes is found to be important empirically. Furthermore, the model delivers a continuous record of instantaneous volatility that is conditional on the timing of trades and quote changes.

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Publisher Info
Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W26.

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Length: 48 pages
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:nuf:econwp:0526

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Web page: http://www.nuff.ox.ac.uk/economics/

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Related research
Keywords: Point process; conditional intensity; Hawkes process; specification test; random time change; transactions data; market microstructure.;

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Find related papers by JEL classification:
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
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
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. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
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  6. Arjas, Elja & Haara, Pentti, 1988. "A note on the exponentiality of total hazards before failure," Journal of Multivariate Analysis, Elsevier, vol. 26(2), pages 207-218, August. [Downloadable!] (restricted)
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  9. Andrews, Donald W K, 2001. "Testing When a Parameter Is on the Boundary of the Maintained Hypothesis," Econometrica, Econometric Society, vol. 69(3), pages 683-734, May.
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  10. Engle, Robert F. & Russell, Jeffrey R., 1997. "Forecasting the frequency of changes in quoted foreign exchange prices with the autoregressive conditional duration model," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 187-212, June. [Downloadable!] (restricted)
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  11. Jeffrey R. Russell & Robert F. Engle, 1998. "Econometric Analysis of Discrete-Valued Irregularly-Spaced Financial Transactions Data Using a New Autoregressive Conditional Multinomial Model," University of California at San Diego, Economics Working Paper Series 98-10, Department of Economics, UC San Diego. [Downloadable!]
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  12. Anthony D. Hall & Nikolaus Hautsch, 2004. "A Continuous-Time Measurement of the Buy-Sell Pressure in a Limit Order Book Market," Research Paper Series 121, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  13. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June. [Downloadable!] (restricted)
  14. Clive Bowsher, 2002. "Modelling Security Market Events in Continuous Time: Intensity based, Multivariate Point Process Models," Economics Papers 2002-W22, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
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  15. Grammig, Joachim & Wellner, Marc, 2002. "Modeling the interdependence of volatility and inter-transaction duration processes," Journal of Econometrics, Elsevier, vol. 106(2), pages 369-400, February. [Downloadable!] (restricted)
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  16. Alfonso Dufour & Robert F. Engle, 2000. "Time and the Price Impact of a Trade," Journal of Finance, American Finance Association, vol. 55(6), pages 2467-2498, December. [Downloadable!] (restricted)
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  17. Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 425-446. [Downloadable!]
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Full references

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. Nikolaus Hautsch, 2007. "Capturing Common Components in High-Frequency Financial Time Series: A Multivariate Stochastic Multiplicative Error Model," CFS Working Paper Series 2007/25, Center for Financial Studies. [Downloadable!]
    Other versions:
  2. Ole E. Barndorff-Nielsen & Neil Shephard, 2005. "Variation, jumps, market frictions and high frequency data in financial econometrics," OFRC Working Papers Series 2005fe08, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  3. Clive G. Bowsher, 2005. "Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models," Economics Papers 2005-W26, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  4. Anthony D. Hall & Nikolaus Hautsch, 2004. "Order Aggressiveness and Order Book Dynamics," FRU Working Papers 2005/04, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
    Other versions:
  5. Jeremy Large, 2004. "Cancellation and Uncertainty Aversion on Limit Order Books," Economics Papers 2004-W05, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  6. Anthony D. Hall & Nikolaus Hautsch, 2004. "A Continuous-Time Measurement of the Buy-Sell Pressure in a Limit Order Book Market," FRU Working Papers 2004/03, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
    Other versions:
  7. Siddhartha Chib & Michael K Pitt & Neil Shephard, 2004. "Likelihood based inference for diffusion driven models," Economics Papers 2004-W20, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
    Other versions:
  8. Hurvich, Clifford & Wang, Yi, 2009. "A Pure-Jump Transaction-Level Price Model Yielding Cointegration, Leverage, and Nonsynchronous Trading Effects," MPRA Paper 12575, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  9. Clive G. Bowsher, 2003. "Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models," Economics Papers 2003-W03, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  10. Luc, BAUWENS & Nikolaus, HAUTSCH, 2006. "Modelling Financial High Frequency Data Using Point Processes," Discussion Papers (ECON - Département des Sciences Economiques) 2006039, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  11. Anthony Tay & Christopher Ting & Yiu Kuen Tse & Mitch Warachka, 2004. "Transaction-Data Analysis of Marked Durations and Their Implications for Market Microstructure," Working Papers 09-2004, Singapore Management University, School of Economics. [Downloadable!]
  12. André A. Monteiro, 2008. "Parameter Driven Multi-state Duration Models: Simulated vs. Approximate Maximum Likelihood Estimation," Tinbergen Institute Discussion Papers 08-021/2, Tinbergen Institute. [Downloadable!]
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