Modelling the Dynamics of Cross-Sectional Price Functions: an Econometric Analysis of the Bid and Ask Curves of an Automated Exchange

Clive Bowsher

No 2004-W21, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: Functional Signal plus Noise (FSN) time series models are introduced for the econometric analysis of the dynamics of a large cross-section of prices in which contemporaneous observations are functionally related. A semiparametric FSN model is developed in which a smooth, cubic spline signal function is used to approximate the price curve data. Estimation may then be performed using quasi-maximum likelihood methods based on the Kalman filter. The model is used to provide one of the first studies of the dynamics of the bid and ask curves of an electronic limit order book and enables the comprehensive measurement of the dynamic determinants of traders execution costs. It is found that the differences between the bid and ask curves and their intercepts (i.e. the immediate price impacts of market orders) are well described by covariance stationary processes. The in-sample, 1-step ahead point predictions for these curves perform well and motivate the development of parametric FSN models that take into account the monotonicity of the price curves and can be used to form predictive distributions.

Keywords: functional time series; bid and ask curves; liquidity; electronic limit order book; cubic spline; state space form; Kalman filter; quasi-maximum likelihood. (search for similar items in EconPapers)
JEL-codes: C14 C32 C33 C51 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-09-22
New Economics Papers: this item is included in nep-fin and nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.nuff.ox.ac.uk/economics/papers/2004/W21/BidAskWP_220904.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.nuff.ox.ac.uk:443 (Bad file descriptor) (http://www.nuff.ox.ac.uk/economics/papers/2004/W21/BidAskWP_220904.pdf [307 Temporary Redirect]--> https://www.nuff.ox.ac.uk/economics/papers/2004/W21/BidAskWP_220904.pdf)

Related works:
Working Paper: Modelling the Dynamics of Cross-Sectional Price Functions: an Econometric Analysis of the Bid and Ask Curves of an Automated Exchange (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:0421

Access Statistics for this paper

More papers in Economics Papers from Economics Group, Nuffield College, University of Oxford Contact information at EDIRC.
Bibliographic data for series maintained by Maxine Collett ().