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Semiparametric Autoregressive Conditional Duration Model: Theory and Practice

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  • Patrick W. Saart
  • Jiti Gao
  • David E. Allen

Abstract

Many existing extensions of the Engle and Russell's (1998) Autoregressive Conditional Duration (ACD) model in the literature are aimed at providing additional flexibility either on the dynamics of the conditional duration model or the allowed shape of the hazard function, i.e., its two most essential components. This article introduces an alternative semiparametric regression approach to a nonlinear ACD model; the use of a semiparametric functional form on the dynamics of the duration process suggests the model being called the Semiparametric ACD (SEMI-ACD) model. Unlike existing alternatives, the SEMI-ACD model allows simultaneous generalizations on both of the above-mentioned components of the ACD framework. To estimate the model, we establish an alternative use of the existing Bühlmann and McNeil's (2002) iterative estimation algorithm in the semiparametric setting and provide the mathematical proof of its statistical consistency in our context. Furthermore, we investigate the asymptotic properties of the semiparametric estimators employed in order to ensure the statistical rigor of the SEMI-ACD estimation procedure. These asymptotic results are presented in conjunction with simulated examples, which provide an empirical evidence of the SEMI-ACD model's robust finite-sample performance. Finally, we apply the proposed model to study price duration process in the foreign exchange market to illustrate its usefulness in practice.

Suggested Citation

  • Patrick W. Saart & Jiti Gao & David E. Allen, 2015. "Semiparametric Autoregressive Conditional Duration Model: Theory and Practice," Econometric Reviews, Taylor & Francis Journals, vol. 34(6-10), pages 849-881, December.
  • Handle: RePEc:taf:emetrv:v:34:y:2015:i:6-10:p:849-881
    DOI: 10.1080/07474938.2014.956594
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    References listed on IDEAS

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    1. COSMA, Antonio & GALLI, Fausto, 2006. "A nonparametric ACD model," CORE Discussion Papers 2006067, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Antonio Cosma & Fausto Galli, 2006. "A Nonparametric ACD Model," LSF Research Working Paper Series 06-10, Luxembourg School of Finance, University of Luxembourg.
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    Cited by:

    1. Pooi AH-HIN & Ng KOK-HAUR & Soo HUEI-CHING, 2016. "Modelling and Forecasting with Financial Duration Data Using Non-linear Model," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(2), pages 79-92.
    2. Gao, Jiti & Kim, Nam Hyun & Saart, Patrick W., 2015. "A misspecification test for multiplicative error models of non-negative time series processes," Journal of Econometrics, Elsevier, vol. 189(2), pages 346-359.

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