A compound duration model for high-frequency asset returns

Eric Aldrich (), Indra Heckenbach and Gregory Laughlin

Journal of Empirical Finance, 2016, vol. 39, issue PA, 105-128

Abstract: This paper builds a model of high-frequency equity returns by separately modeling the dynamics of trade-time returns and trade arrivals. Our main contributions are threefold. First, we characterize the distributional behavior of high-frequency asset returns both in ordinary clock time and in trade time. We show that when controlling for pre-scheduled market news events, trade-time returns of the near-month E-mini S&P 500 futures contract are well characterized by a Gaussian distribution at very fine time scales. Second, we develop a structured and parsimonious model of clock-time returns using a time-changed Brownian motion composed with a general, non-Lévy directing process. Particular cases of this model allow for leptokurtosis and volatility clustering in clock-time returns, even when trade-time returns are Gaussian. Finally, we highlight conditions for the directing process which are required in order to generate proper volatility dynamics while simultaneously matching the unconditional distribution of returns. In-sample fitting and out-of-sample realized volatility forecasting demonstrate the strength of our model relative to leading candidates.

Keywords: High-frequency trading; US equities; News arrival (search for similar items in EconPapers)
JEL-codes: C22 C41 C58 G12 G14 G17 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:39:y:2016:i:pa:p:105-128

DOI: 10.1016/j.jempfin.2016.10.003

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