IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1310.4539.html
   My bibliography  Save this paper

Modeling the coupled return-spread high frequency dynamics of large tick assets

Author

Listed:
  • Gianbiagio Curato
  • Fabrizio Lillo

Abstract

Large tick assets, i.e. assets where one tick movement is a significant fraction of the price and bid-ask spread is almost always equal to one tick, display a dynamics in which price changes and spread are strongly coupled. We introduce a Markov-switching modeling approach for price change, where the latent Markov process is the transition between spreads. We then use a finite Markov mixture of logit regressions on past squared returns to describe the dependence of the probability of price changes. The model can thus be seen as a Double Chain Markov Model. We show that the model describes the shape of return distribution at different time aggregations, volatility clustering, and the anomalous decrease of kurtosis of returns. We calibrate our models on Nasdaq stocks and we show that this model reproduces remarkably well the statistical properties of real data.

Suggested Citation

  • Gianbiagio Curato & Fabrizio Lillo, 2013. "Modeling the coupled return-spread high frequency dynamics of large tick assets," Papers 1310.4539, arXiv.org.
  • Handle: RePEc:arx:papers:1310.4539
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1310.4539
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Onnela, Jukka-Pekka & Töyli, Juuso & Kaski, Kimmo, 2009. "Tick size and stock returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(4), pages 441-454.
    2. Bulla, Jan & Bulla, Ingo, 2006. "Stylized facts of financial time series and hidden semi-Markov models," Computational Statistics & Data Analysis, Elsevier, vol. 51(4), pages 2192-2209, December.
    3. La Spada Gabriele & Lillo Fabrizio, 2014. "The effect of round-off error on long memory processes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(4), pages 1-38, September.
    4. Frédéric Abergel & Anirban Chakraborti & B.K. Chakrabarti & M. Mitra, 2011. "Econophysics of order-driven markets," Post-Print hal-00872396, HAL.
    5. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    6. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    7. Laszlo Gillemot & J. Doyne Farmer & Fabrizio Lillo, 2006. "There's more to volatility than volume," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 371-384.
    8. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
    9. Roman Liesenfeld & Ingmar Nolte & Winfried Pohlmeier, 2008. "Modelling financial transaction price movements: a dynamic integer count data model," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 167-197, Springer.
    10. Mike, Szabolcs & Farmer, J. Doyne, 2008. "An empirical behavioral model of liquidity and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 200-234, January.
    11. Timmermann, Allan, 2000. "Moments of Markov switching models," Journal of Econometrics, Elsevier, vol. 96(1), pages 75-111, May.
    12. Axel Groß‐KlußMann & Nikolaus Hautsch, 2013. "Predicting Bid–Ask Spreads Using Long‐Memory Autoregressive Conditional Poisson Models," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(8), pages 724-742, December.
    13. Tobias Rydén & Timo Teräsvirta & Stefan Åsbrink, 1998. "Stylized facts of daily return series and the hidden Markov model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 217-244.
    14. Christian Y. Robert & Mathieu Rosenbaum, 2011. "A New Approach for the Dynamics of Ultra-High-Frequency Data: The Model with Uncertainty Zones," Journal of Financial Econometrics, Oxford University Press, vol. 9(2), pages 344-366, Spring.
    15. Fabien Guilbaud & Huyen Pham, 2011. "Optimal High Frequency Trading with limit and market orders," Working Papers hal-00603385, HAL.
    16. Zoltán Eisler & Jean-Philippe Bouchaud & Julien Kockelkoren, 2012. "The price impact of order book events: market orders, limit orders and cancellations," Quantitative Finance, Taylor & Francis Journals, vol. 12(9), pages 1395-1419, September.
    17. A. Gareche & G. Disdier & J. Kockelkoren & J. -P. Bouchaud, 2013. "A Fokker-Planck description for the queue dynamics of large tick stocks," Papers 1304.6819, arXiv.org.
    18. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2008. "Relation between bid-ask spread, impact and volatility in order-driven markets," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 41-57.
    19. Fabien Guilbaud & Huyen Pham, 2011. "Optimal High Frequency Trading with limit and market orders," Papers 1106.5040, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Francesco Lamperti, 2015. "An Information Theoretic Criterion for Empirical Validation of Time Series Models," LEM Papers Series 2015/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Weibing Huang & Charles-Albert Lehalle & Mathieu Rosenbaum, 2015. "Simulating and Analyzing Order Book Data: The Queue-Reactive Model," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 110(509), pages 107-122, March.
    2. Martin D. Gould & Mason A. Porter & Stacy Williams & Mark McDonald & Daniel J. Fenn & Sam D. Howison, 2010. "Limit Order Books," Papers 1012.0349, arXiv.org, revised Apr 2013.
    3. Maheu, John M. & McCurdy, Thomas H., 2000. "Volatility dynamics under duration-dependent mixing," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 345-372, November.
    4. Liu, Xinyi & Margaritis, Dimitris & Wang, Peiming, 2012. "Stock market volatility and equity returns: Evidence from a two-state Markov-switching model with regressors," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 483-496.
    5. Martin D. Gould & Mason A. Porter & Stacy Williams & Mark McDonald & Daniel J. Fenn & Sam D. Howison, 2013. "Limit order books," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1709-1742, November.
    6. Milan Kumar Das & Anindya Goswami, 2019. "Testing of binary regime switching models using squeeze duration analysis," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-20, March.
    7. Krishnamurthy, Vikram & Leoff, Elisabeth & Sass, Jörn, 2018. "Filterbased stochastic volatility in continuous-time hidden Markov models," Econometrics and Statistics, Elsevier, vol. 6(C), pages 1-21.
    8. Yizhan Shu & Chenyu Yu & John M. Mulvey, 2024. "Regime-Aware Asset Allocation: a Statistical Jump Model Approach," Papers 2402.05272, arXiv.org.
    9. Thibault Jaisson, 2015. "Liquidity and Impact in Fair Markets," Papers 1506.02507, arXiv.org.
    10. Cheung, Yin-Wong & Erlandsson, Ulf G., 2005. "Exchange Rates and Markov Switching Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 314-320, July.
    11. Jan Bulla, 2010. "Hidden Markov models with t components. Increased persistence and other aspects," Quantitative Finance, Taylor & Francis Journals, vol. 11(3), pages 459-475.
    12. Gianna Boero & Emanuela Marrocu, 2005. "Evaluating non-linear models on point and interval forecasts: an application with exchange rates," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 58(232), pages 91-120.
    13. Sean D. Campbell, 2002. "Specification Testing and Semiparametric Estimation of Regime Switching Models: An Examination of the US Short Term Interest Rate," Working Papers 2002-26, Brown University, Department of Economics.
    14. Aur'elien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Papers 1404.0648, arXiv.org, revised Jun 2015.
    15. Chevallier, Julien, 2011. "Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models," Economic Modelling, Elsevier, vol. 28(6), pages 2634-2656.
    16. Jean-Marie Dufour & Richard Luger, 2017. "Identification-robust moment-based tests for Markov switching in autoregressive models," Econometric Reviews, Taylor & Francis Journals, vol. 36(6-9), pages 713-727, October.
    17. Demian Pouzo & Zacharias Psaradakis & Martin Sola, 2022. "Maximum Likelihood Estimation in Markov Regime‐Switching Models With Covariate‐Dependent Transition Probabilities," Econometrica, Econometric Society, vol. 90(4), pages 1681-1710, July.
    18. Massimo Guidolin & Allan Timmermann, 2006. "An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 1-22, January.
    19. Kaihua Deng, 2018. "Another Look at Large-Cap Stock Return Comovement: A Semi-Markov-Switching Approach," Computational Economics, Springer;Society for Computational Economics, vol. 51(2), pages 227-262, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1310.4539. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.