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Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes

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  • Nikolaus Hautsch
  • Peter Malec
  • Melanie Schienle

Abstract

We propose a novel approach to model serially dependent positive-valued variables which realize a non-trivial proportion of zero outcomes. This is a typical phenomenon in financial time series observed at high frequencies, such as cumulated trading volumes. We introduce a flexible point-mass mixture distribution and develop a semiparametric specification test explicitly tailored for such distributions. Moreover, we propose a new type of multiplicative error model based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations. Applying the proposed model to high-frequency cumulated trading volumes of both liquid and illiquid NYSE stocks, we show that the model captures the dynamic and distributional properties of the data well and is able to correctly predict future distributions.

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  • Nikolaus Hautsch & Peter Malec & Melanie Schienle, 2014. "Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(1), pages 89-121.
  • Handle: RePEc:oup:jfinec:v:12:y:2014:i:1:p:89-121.
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    More about this item

    Keywords

    high-frequency data; point-mass mixture; multiplicative error model; excess zeros; semiparametric specification test; market microstructure;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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