Nonlinearities in stochastic clocks: trades and volume as subordinators of electronic markets

Rafael Velasco-Fuentes and Wing Lon Ng

Quantitative Finance, 2011, vol. 11, issue 6, 863-881

Abstract: This paper discusses the possibility of recovering normality of asset returns through a stochastic time change, where the appropriate economic time is determined through a simple parametric function of the cumulative number of trades and/or the cumulative volume. The existing literature argues that the re-centred cumulative number of trades could be used as the appropriate stochastic clock of the market under which asset returns are virtually Gaussian. Using tick-data for FTSE-100 futures, we show that normality is not always recovered by conditioning on the re-centred number of trades. However, it can be shown that simply extending the approach to a nonlinear function can provide a better stochastic clock of the market.

Keywords: High frequency; Stochastic time changes; Subordinators; Transaction frequency; Trading volume (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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DOI: 10.1080/14697680903555314

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