The Endo-Exo Problem in High Frequency Financial Price Fluctuations and Rejecting Criticality

Spencer Wheatley, Alexander Wehrli and Didier Sornette
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Spencer Wheatley: ETH Zurich
Didier Sornette: ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

No 18-57, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The endo-exo problem lies at the heart of statistical identification in many fields of science, and is often plagued by spurious strong-and-long memory due to improper treatment of trends, shocks and shifts in the data. A class of models that has shown to be useful in discerning exogenous and endogenous activity is the Hawkes process. This class of point processes has enjoyed great recent popularity and rapid development within the quantitative finance literature, with particular focus on the study of market microstructure and high frequency price fluctuations. We show that there are important lessons from older fields like time series and econometrics that should also be applied in financial point process modelling. In particular, we emphasize the importance of appropriately treating trends and shocks for the identification of the strength and length of memory in the system. We exploit the powerful Expectation Maximization (EM) algorithm and objective statistical criteria (BIC) to select the flexibility of the deterministic background intensity. With these methods, we strongly reject the hypothesis that the considered financial markets are critical at univariate and bivariate microstructural levels.

Keywords: mid-price changes; trade times; Hawkes process; endogeneity; criticality; Expectation- Maximization; BIC; non-stationarity; ARMA point process; spurious inference; external shocks (search for similar items in EconPapers)
JEL-codes: C01 C40 C52 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2018-08
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mst and nep-ore
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1857

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