Inventory Effects on Daily Returns in Financial Markets

Andreas Krause ()
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Andreas Krause: University of Bath, School of Management, Bath BA2 7AY, Great Britain, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 07, 739-765

Abstract: In this paper we investigate the properties of daily returns arising from inventory effects. We therefore use the well established framework of inventory-based models from market microstructure theory. It is shown using simulation studies that from this model daily returns exhibit excess volatility, negative first-order autocovariances and the volatility has a positive first-order autocovariance, which is consistent with a GARCH-process. An empirical investigation shows that a substantial part of the properties of daily returns in stock market data can be explained by inventory effects.

Keywords: Inventory; return volatility; heteroskedasticity; GARCH (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1142/S0219024903002171

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