A Dynamic Semiparametric Proportional Hazard Model

Frank Gerhard and Nikolaus Hautsch
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Frank Gerhard: Barclays Capital, London
Nikolaus Hautsch: Department of Economics, University of Copenhagen

No 2006/05, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: This paper proposes a dynamic proportional hazard (PH) model with non-specified baseline hazard for the modelling of autoregressive duration processes. A categorization of the durations allows us to reformulate the PH model as an ordered response model based on extreme value distributed errors. In order to capture persistent serial dependence in the duration process, we extend the model by an observation driven ARMA dynamic based on generalized errors. We illustrate the maximum likelihood estimation of both the model parameters and discrete points of the underlying unspecified baseline survivor function. The dynamic properties of the model as well as an assessment of the estimation quality is investigated in a Monte Carlo study. It is illustrated that the model is a useful approach to estimate conditional failure probabilities based on (persistent) serial dependent duration data which might be subject to censoring structures. In an empirical study based on financial transaction data we present an application of the model to estimate conditional asset price change probabilities. Evaluating the forecasting properties of the model, it is shown that the proposed approach is a promising competitor to well-established ACD type models.

Keywords: autoregressive duration models; dynamic ordered response models; generalized residuals; censoring (search for similar items in EconPapers)
JEL-codes: C22 C25 C41 G14 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-10
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mst
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Related works:
Journal Article: A Dynamic Semiparametric Proportional Hazard Model (2007)
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