Ensemble vs. time averages in financial time series analysis

Lars Seemann, Jia-Chen Hua, Joseph L. McCauley and Gemunu H. Gunaratne

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 23, 6024-6032

Abstract: Empirical analysis of financial time series suggests that the underlying stochastic dynamics are not only non-stationary, but also exhibit non-stationary increments. However, financial time series are commonly analyzed using the sliding interval technique that assumes stationary increments. We propose an alternative approach that is based on an ensemble over trading days. To determine the effects of time averaging techniques on analysis outcomes, we create an intraday activity model that exhibits periodic variable diffusion dynamics and we assess the model data using both ensemble and time averaging techniques. We find that ensemble averaging techniques detect the underlying dynamics correctly, whereas sliding intervals approaches fail. As many traded assets exhibit characteristic intraday volatility patterns, our work implies that ensemble averages approaches will yield new insight into the study of financial markets’ dynamics.

Keywords: Econophysics; Variable diffusion; Financial markets (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:23:p:6024-6032

DOI: 10.1016/j.physa.2012.06.054

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