Inference and forecasting for continuous-time integer-valued trawl processes and their use in financial economics

Mikkel Bennedsen (), Asger Lunde (), Neil Shephard () and Almut Veraart
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Mikkel Bennedsen: Department of Economics and Business Economics, Aarhus University and CREATES, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Asger Lunde: Copenhagen Economics and CREATES, Postal: Langebrogade 1B, 1411 Copenhagen K, Denmark
Neil Shephard: Department of Economics and Department of Statistics, Harvard University, Postal: One Oxford Street, Cambridge, MA 02138, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper develops likelihood-based methods for estimation, inference, model selection, and forecasting of continuous-time integer-valued trawl processes. The full likelihood of integer-valued trawl processes is, in general, highly intractable, motivating the use of composite likelihood methods, where we consider the pairwise likelihood in lieu of the full likelihood. Maximizing the pairwise likelihood of the data yields an estimator of the parameter vector of the model, and we prove consistency and asymptotic normality of this estimator. The same methods allow us to develop probabilistic forecasting methods, which can be used to construct the predictive distribution of integer-valued time series. In a simulation study, we document good finite sample performance of the likelihood-based estimator and the associated model selection procedure. Lastly, the methods are illustrated in an application to modelling and forecasting financial bid-ask spread data, where we find that it is beneficial to carefully model both the marginal distribution and the autocorrelation structure of the data. We argue that integer-valued trawl processes are especially well-suited in such situations.

Keywords: Integer valued trawl process; Lévy basis; composite likelihood; pairwise likelihood; estimation; model selection; forecasting (search for similar items in EconPapers)
JEL-codes: C01 C13 C22 C51 C53 G17 (search for similar items in EconPapers)
Pages: 79
Date: 2021-07-27
New Economics Papers: this item is included in nep-ets, nep-for, nep-isf and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2021-12

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