Testing the Markov property with ultra high frequency financial data

João Amaro de Matos and Marcelo Fernandes

No 414, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: This paper develops a framework to test whether discrete-valued irregularly-spaced financial transactions data follow a subordinated Markov process. For that purpose, we consider a specific optional sampling in which a continuous-time Markov process is observed only when it crosses some discrete level. This framework is convenient for it accommodates not only the irregular spacing of transactions data, but also price discreteness. Further, it turns out that, under such an observation rule, the current price duration is independent of previous price durations given the current price realization. A simple nonparametric test then follows by examining whether this conditional independence property holds. Finally, we investigate whether or not bid-ask spreads follow Markov processes using transactions data from the New York Stock Exchange. The motivation lies on the fact that asymmetric information models of market microstructures predict that the Markov property does not hold for the bid-ask spread. The results are mixed in the sense that the Markov assumption is rejected for three out of the five stocks we have analyzed.

Date: 2001-03-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repositorio.fgv.br/bitstreams/64dd753a-19b ... 734a96d20eb/download (application/pdf)

Related works:
Working Paper: Testing the Markov property with ultra-high frequency financial data (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:414

Access Statistics for this paper

More papers in FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil) Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().