Testing the Markov property with ultra-high frequency financial data
AbstractThis paper develops a framework to nonparametrically test whether discretevalued irregularly-spaced financial transactions data follow a Markov process. For that purpose, we consider a specific optional sampling in which a continuous-time Markov process is observed only when it crosses some discrete level. This framework is convenient for it accommodates not only the irregular spacing of transactions data, but also price discreteness. Under such an observation rule, the current price duration is independent of previous price durations given the current price realization. A simple nonparametric test then follows by examining whether this conditional independence property holds. Finally, we investigate whether or not bid-ask spreads follow Markov processes using transactions data from the New York Stock Exchange. The motivation lies on the fact that asymmetric information models of market microstructures predict that the Markov property does not hold for the bid-ask spread. The results are mixed in the sense that the Markov assumption is rejected for three out of the five stocks we have analyzed.
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Bibliographic InfoPaper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp462.
Length: 25 pages
Date of creation: 2004
Date of revision:
Bid-ask spread; nonparametric testing; price durations; Markov property; ultra-high frequency data;
Other versions of this item:
- Matos, João Manuel Gonçalves Amaro de & Fernandes, Marcelo, 2001. "Testing The Markov Property with Ultra High Frequency Financial Data," Economics Working Papers (Ensaios Economicos da EPGE) 414, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G19 - Financial Economics - - General Financial Markets - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-20 (All new papers)
- NEP-CFN-2005-12-20 (Corporate Finance)
- NEP-ECM-2005-12-20 (Econometrics)
- NEP-ETS-2005-12-20 (Econometric Time Series)
- NEP-FIN-2005-12-20 (Finance)
- NEP-FMK-2005-12-20 (Financial Markets)
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