Econometric Modelling of Stock Market Intraday Activity

by Bauwens, Luc; Giot, Pierre-Roland

• ISBN13: 9780792374244
• ISBN10: 079237424X
• Format: Hardcover
• Copyright: 2001-08-01
• Publisher: Kluwer Academic Pub

Summary

The recent widespread availability of intraday tick-by-tick databases for stocks, options and currencies has had an important impact on research in applied financial econometrics and market microstructure. Econometric Modelling of Stock Market Intraday Activity focuses on the econometric modelling of intraday tick-by-tick transaction data (trades and quote) for stock traded on the New York Stock Exchange (NYSE). Recent quantitative modelling tools such as intraday duration models and GARCH modes are presented. A survey of trading mechanisms in financial markets and a review of market microstructure issues is also included, which allows to gain a better understanding of the motivation underlying the use of the quantitative models. In the empirical applications, the link is made with the models of the market microstructure literature that have proposed an explicit treatment of time in the trading process. Other empirical applications deal with the modelling of intraday volatility and intraday Value-at-Risk. Although the models are applied to data for stock traded on the NYSE, they are not specific to this exchange and could be used to analyze other existing trading mechanisms. Accordingly, this book should be of interest to academics and graduate students involved in empirical finance and applied econometrics, regulators working for exchanges, and practitioners in banks or brokerage firms.

Author Biography

Luc Bauwens is Professor of Economics at the Universit+¬ catholique de Louvain, Belgium where he chairs the Department of Economics, and has been co-director of the Center for Operations Research and Econometrics (CORE) from 1992 to 1998. He has published several books and papers in the fields of Bayesian inference, time series methods, simulation and numerical methods in econometrics, as well as empirical finance and international trade.Pierre Giot is Professor of Econometrics and Quantitative Finance at Maastricht University in The Netherlands, and he is a member of CORE in Belgium. After graduating as a Civil Engineer (Polytechnique) in Electronics, he got his Ph.D. in Economics at the Universit+¬ catholique de Louvain in 1999. His current research interests focus on quantitative finance, models for intraday data and empirical market microstructure.

Table of Contents

Acknowledgments	vii
Introduction	ix
Market Microstructure, Trading Mechanisms and Exchanges	1	(34)
Introduction	1	(1)
Price setting in financial markets	2	(9)
The Walrasian auction	2	(1)
Price driven and order driven markets	2	(4)
Characteristics of trading mechanisms	6	(1)
Market Liquidity	7	(4)
Exchanges	11	(10)
The New York Stock Exchange	11	(4)
The NASDAQ	15	(2)
The Foreign Exchange market	17	(1)
The Paris Bourse	18	(3)
Market microstructure	21	(14)
Behavior of market makers: theoretical models	21	(3)
Empirical research	24	(11)
Nyse Taq Database and Financial Durations	35	(30)
Introduction	35	(1)
The TAQ database	36	(5)
The trade database	36	(1)
The quote database	37	(1)
Best bid-ask quotes	38	(2)
Direction of a trade	40	(1)
Downstairs or upstairs trade?	40	(1)
Recording mistakes	40	(1)
Bid-ask bounce	41	(1)
Extracting information from the TAQ database	41	(3)
Durations	44	(4)
Price durations	45	(2)
Volume durations	47	(1)
Durations: a descriptive analysis	48	(17)
Trades and quotes	49	(1)
Intraday seasonality	50	(2)
Time-of-day adjusted durations	52	(13)
Intraday Duration Models	65	(42)
Introduction	65	(1)
Basic statistical concepts	65	(4)
Econometric models	69	(22)
ACD models	70	(6)
Logarithmic ACD models	76	(5)
Estimation	81	(2)
Diagnostics	83	(8)
Illustration on NYSE data	91	(6)
Appendix: probability distributions	97	(10)
Empirical Results and Extensions	107	(18)
Introduction	107	(1)
Market microstructure effects	108	(3)
Adding variables in the ACD model	108	(1)
Empirical application	109	(2)
A joint model of durations and price change indicators	111	(11)
The model	113	(3)
Empirical application	116	(2)
Forecasting and trading rules	118	(4)
Appendix	122	(3)
Intraday Volatility and Value-at-Risk	125	(48)
Introduction	125	(1)
A review of ARCH models	126	(6)
Asset returns and market efficiency	126	(2)
The ARCH model	128	(2)
Extensions	130	(2)
ARCH models for intraday data	132	(15)
Time transformations and intraday seasonality	133	(8)
GARCH and EGARCH Models	141	(3)
Volume and number of trades	144	(3)
Intraday Value-at-Risk	147	(26)
Value-at-Risk	147	(2)
VaR models for intraday data	149	(3)
Empirical application	152	(21)
About the Authors	173	(2)
Index	175