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Local Adaptive Multiplicative Error Models for High-Frequency Forecasts

Wolfgang Karl Härdle, Nikolaus Hautsch () and Andrija Mihoci ()
Authors registered in the RePEc Author Service: Wolfgang Karl Härdle ()

No SFB649DP2012-031, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: We propose a local adaptive multiplicative error model (MEM) accommodating timevarying parameters. MEM parameters are adaptively estimated based on a sequential testing procedure. A data-driven optimal length of local windows is selected, yielding adaptive forecasts at each point in time. Analyzing one-minute cumulative trading volumes of five large NASDAQ stocks in 2008, we show that local windows of approximately 3 to 4 hours are reasonable to capture parameter variations while balancing modelling bias and estimation (in)efficiency. In forecasting, the proposed adaptive approach significantly outperforms a MEM where local estimation windows are fixed on an ad hoc basis.

Keywords: multiplicative error model; local adaptive modelling; high-frequency processes; trading volume; forecasting (search for similar items in EconPapers)
JEL-codes: C41 C51 C53 G12 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-mst
Date: 2012-04
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Journal Article: Local Adaptive Multiplicative Error Models for High‐Frequency Forecasts (2015) Downloads
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