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A New Approach for the Dynamics of Ultra-High-Frequency Data: The Model with Uncertainty Zones

  • Christian Y. Robert
  • Mathieu Rosenbaum
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    In this paper, we provide a model which accommodates the assumption of a continuous efficient price with the inherent properties of ultra-high-frequency transaction data (price discreteness, irregular temporal spacing, diurnal patterns...). Our approach consists in designing a stochastic mechanism for deriving the transaction prices from the latent efficient price. The main idea behind the model is that, if a transaction occurs at some value on the tick grid and leads to a price change, then the efficient price has been close enough to this value shortly before the transaction. We call uncertainty zones the bands around the mid-tick grid where the efficient price is too far from the tick grid to trigger a price change. In our setting, the width of these uncertainty zones quantifies the aversion to price changes of the market participants. Furthermore, this model enables us to derive approximated values of the efficient price at some random times, which is particularly useful for building statistical procedures. Convincing results are obtained through a simulation study and the use of the model over 10 representative stocks. Copyright The Author 2010. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbq023
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    Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

    Volume (Year): 9 (2011)
    Issue (Month): 2 (Spring)
    Pages: 344-366

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    Handle: RePEc:oup:jfinec:v:9:y:2011:i:2:p:344-366
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