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Nonlinearities in stochastic clocks: trades and volume as subordinators of electronic markets

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  • Rafael Velasco-Fuentes
  • Wing Lon Ng

Abstract

This paper discusses the possibility of recovering normality of asset returns through a stochastic time change, where the appropriate economic time is determined through a simple parametric function of the cumulative number of trades and/or the cumulative volume. The existing literature argues that the re-centred cumulative number of trades could be used as the appropriate stochastic clock of the market under which asset returns are virtually Gaussian. Using tick-data for FTSE-100 futures, we show that normality is not always recovered by conditioning on the re-centred number of trades. However, it can be shown that simply extending the approach to a nonlinear function can provide a better stochastic clock of the market.

Suggested Citation

  • Rafael Velasco-Fuentes & Wing Lon Ng, 2011. "Nonlinearities in stochastic clocks: trades and volume as subordinators of electronic markets," Quantitative Finance, Taylor & Francis Journals, vol. 11(6), pages 863-881.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:6:p:863-881
    DOI: 10.1080/14697680903555314
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    References listed on IDEAS

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    Cited by:

    1. Ata Türkoğlu, 2016. "Normally distributed high-frequency returns: a subordination approach," Quantitative Finance, Taylor & Francis Journals, vol. 16(3), pages 389-409, March.
    2. William H. Press, 2023. "NYSE Price Correlations Are Abitrageable Over Hours and Predictable Over Years," Papers 2305.08241, arXiv.org.

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