Modeling the coupled return-spread high frequency dynamics of large tick assets. (21st January 2015)

• Record Type: Journal Article
• Authors: Curato, Gianbiagio; Lillo, Fabrizio
• Is Part Of: Journal of statistical mechanics. (2015:Jan.)
• Publication Date: 2015-01-21
• Subjects: 12; 12/060 -- 12/070 -- 12/110; Statistical mechanics -- Periodicals; Mechanics -- Statistical methods -- Periodicals; 530.1305
• DOI: 10.1088/1742-5468/2015/01/P01028
• Languages: English
• ISSNs: 1742-5468

Abstract

Abstract: Large tick assets, i.e. assets where one tick movement is a significant fraction of the price and bid-ask spread is almost always equal to one tick, display a dynamics in which price changes and spread are strongly coupled. We present an approach based on the hidden Markov model, also known in econometrics as the Markov switching model, for the dynamics of price changes, where the latent Markov process is described by the transitions between spreads. We then use a finite Markov mixture of logit regressions on past squared price changes to describe temporal dependencies in the dynamics of price changes. The model can thus be seen as a double chain Markov model. We show that the model describes the shape of the price change distribution at different time scales, volatility clustering, and the anomalous decrease of kurtosis. We calibrate our models based on Nasdaq stocks and we show that this model reproduces remarkably well the statistical properties of real data.