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Change point dynamics for financial data: an indexed Markov chain approach

Author

Listed:
  • Guglielmo D’Amico

    (Università “G. D’Annunzio” di Chieti-Pescara)

  • Ada Lika

    (Università degli studi di Cagliari)

  • Filippo Petroni

    (Università degli studi di Cagliari)

Abstract

This paper uses an Indexed Markov Chain to model high frequency price returns of quoted rms. Introducing an Index process permits consideration of endogenous market volatility, and two important stylized facts of financial time series can be taken into account: long memory and volatility clustering. This paper rst proposes a method to optimally determine the state space of the Index process, which is based on a change-point approach for Markov chains. Furthermore, we provide an explicit formula for the probability distribution function of the rst change of state of the Index process. Results are illustrated with an application to intra-day firm prices.

Suggested Citation

  • Guglielmo D’Amico & Ada Lika & Filippo Petroni, 2019. "Change point dynamics for financial data: an indexed Markov chain approach," Annals of Finance, Springer, vol. 15(2), pages 247-266, June.
    • Handle: RePEc:kap:annfin:v:15:y:2019:i:2:d:10.1007_s10436-018-0337-0
    DOI: 10.1007/s10436-018-0337-0
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    References listed on IDEAS

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    16. D’Amico, Guglielmo & Petroni, Filippo, 2018. "Copula based multivariate semi-Markov models with applications in high-frequency finance," European Journal of Operational Research, Elsevier, vol. 267(2), pages 765-777.
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    Citations

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    Cited by:

    1. Riccardo De Blasis, 2023. "Weighted-indexed semi-Markov model: calibration and application to financial modeling," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-16, December.
    2. Guglielmo D’Amico & Giovanni Masala & Filippo Petroni & Robert Adam Sobolewski, 2020. "Managing Wind Power Generation via Indexed Semi-Markov Model and Copula," Energies, MDPI, vol. 13(16), pages 1-21, August.
    3. Guglielmo D’Amico & Giovanni Villani, 2021. "Valuation of R&D compound option using Markov chain approach," Annals of Finance, Springer, vol. 17(3), pages 379-404, September.

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    More about this item

    Keywords

    Change point; Financial returns; Volatility; Intra-day prices;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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