The latent factor VAR model: Testing for a common component in the intraday trading process

Nikolaus Hautsch ()

No 2005/03, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: In this paper, we propose a framework for the modelling of multivariate dynamic processes which are driven by an unobservable common autoregressive component. Economically motivated by the mixture-of-distribution hypothesis, we model the multivariate intraday trading process of return volatility, volume and trading intensity by a VAR model that is augmentedby a joint latent factor serving as a proxy for the unobserved information flow. The model is estimated by simulated maximum likelihood using efficient importance sampling techniques. Analyzing intraday data from the NYSE, we find strong empirical evidence for the existence of an underlying persistent component as an important driving force of the trading process. It is shown that the inclusion of the latent factor clearly improves the goodness-of-fit of the model as well as its dynamical and distributional properties.

Keywords: observation vs. parameter driven dynamics; mixture-of-distribution hypothesis; VAR model; efficient importance sampling (search for similar items in EconPapers)
JEL-codes: C15 C32 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2005-03
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Persistent link: http://EconPapers.repec.org/RePEc:kud:kuiefr:200503

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