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Modelling High-Frequency Volatility and Liquidity Using Multiplicative Error Models

  • Nikolaus Hautsch
  • Vahidin Jeleskovic

In this paper, we study the dynamic interdependencies between high-frequency volatility, liquidity demand as well as trading costs in an electronic limit order book market. Using data from the Australian Stock Exchange we model 1-min squared mid-quote returns, average trade sizes, number of trades and average (excess) trading costs per time interval in terms of a four-dimensional multiplicative error model. The latter is augmented to account also for zero observations. We find evidence for significant contemporaneous relationships and dynamic interdependencies between the individual variables. Liquidity is causal for future volatility but not vice versa. Furthermore, trade sizes are negatively driven by past trading intensities and trading costs. Finally, excess trading costs mainly depend on their own history.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-047.

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Length: 20 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-047
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  1. BAUWENS, Luc & VEREDAS, David, 1999. "The stochastic conditional duration model: a latent factor model for the analysis of financial durations," CORE Discussion Papers 1999058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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