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Durations, Volume and the Prediction of Financial Returns in Transaction Time

  • Christian M. Hafner

    (Electrabel)

Traditional microstructural theories of asset pricing emphasize the role of volume as a trend indicator. With the availability of large transaction data sets, one has started recently to incorporate more information of the trades, such as the time between trades, to describe the multivariate dynamics of transactions. Without knowing a priori the relation between the observed components of a trade - price, duration between trades, and volume - one may follow the principle of `letting the data speak for themselves'. The goal of this paper is to evaluate the informational content of both volume and durations to predict transaction returns using explorative nonparametric methods. The empirical results for transaction data of IBM stock prices confirm the role of volume as a trend indicator and suggest that the bid-ask bounce is smaller in highly active than in less active trading periods. That is, after a sell (buy) expected returns are decreasing (increasing) with volume and increasing (decreasing) with durations.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0599.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0599
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  1. BAUWENS, Luc & GIOT, Pierre, . "The logarithmic ACD model: an application to the bid-ask quote process of three NYSE stocks," CORE Discussion Papers RP 1497, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
  3. BAUWENS, Luc & GIOT, Pierre, . "Asymmetric ACD models: Introducing price information in ACD models," CORE Discussion Papers RP 1670, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  5. Gouriéroux, Christian & Jasiak, Joanna & Le Fol, Gaëlle, 1999. "Intra-day market activity," Economics Papers from University Paris Dauphine 123456789/5478, Paris Dauphine University.
  6. Jeffrey R. Russell & Robert F. Engle, 1998. "Econometric Analysis of Discrete-valued Irregularly-spaced Financial Transactions Data Using a New Autoregressive Conditional Multinomial Model," CRSP working papers 470, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Dufour, Alfonso & Engle, Robert F, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series qt62c0h04j, Department of Economics, UC San Diego.
  8. Robert F. Engle, 2000. "The Econometrics of Ultra-High Frequency Data," Econometrica, Econometric Society, vol. 68(1), pages 1-22, January.
  9. Wolfgang HÄRDLE & A. TSYBAKOV & L. YANG, 1996. "Nonparametric Vector Autoregression," SFB 373 Discussion Papers 1996,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  10. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
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