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A simple linear alternative to multiplicative error models with an application to trading volume

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Abstract

Forecasting intraday trading volume is an important problem in economics and finance. One influential approach to achieving this objective is the non-linear Component Multiplicative Error Model (CMEM) that captures time series dependence and intraday periodicity in volume. While the model is well suited to dealing with a non-negative time series, it is relatively cumbersome to implement. This paper proposes a system of linear equations, that is estimated using ordinary least squares, and provides at least as good a forecasting performance as that of the CMEM. This linear specification can easily be applied to model any time series that exhibits diurnal behaviour.

Suggested Citation

  • Clements, Adam & Hurn, Stan & Volkov, Vladimir, 2021. "A simple linear alternative to multiplicative error models with an application to trading volume," Working Papers 2021-06, University of Tasmania, Tasmanian School of Business and Economics.
    • Handle: RePEc:tas:wpaper:38716
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    File URL: https://eprints.utas.edu.au/38716/1/2021-06_Clements_Hurn_Volkov.pdf
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    References listed on IDEAS

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G00 - Financial Economics - - General - - - General

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