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Dynamics of trade-by-trade price movements: decomposition and models

In this paper we introduce a decomposition of the joint distribution of price changes of assets recorded trade--by--trade. Our decomposition means that we can model the dynamics of price changes using quite simple and interpretable models which are easily extended in a great number of directions, including using durations and volume as explanatory variables. Thus we provide an econometric basis for empirical work on market microstructure using time series of transactions data. We use maximum likelihood estimation and testing methods to assess the fit of the model to a year of IBM stock price data taken from the New York Stock Exchange.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2002/w1/jfe.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2002-W1.

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Length: 28 pages
Date of creation: 01 Jan 2002
Date of revision:
Handle: RePEc:nuf:econwp:0201
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Ghysels Eric & Jasiak Joanna, 1998. "GARCH for Irregularly Spaced Financial Data: The ACD-GARCH Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(4), pages 1-19, January.
  2. Manganelli, Simone, 2002. "Duration, volume and volatility impact of trades," Working Paper Series 0125, European Central Bank.
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