Continuous Time Analysis of Fleeting Discrete Price Moves. Issue 519 (3rd July 2017)

• Record Type: Journal Article
• Authors: Shephard, Neil; Yang, Justin J.
• Is Part Of: Journal of the American Statistical Association. Volume 112:Issue 519(2017)
• Page Start: 1090
• Page End: 1106
• Publication Date: 2017-07-03
• Subjects: Integer-valued stochastic process -- Lévy basis -- Lévy process -- Market microstructure -- Realized variance -- Trawl process; Statistics -- Periodicals; Statistics -- Periodicals; Statistiques -- Périodiques; États-Unis -- Statistiques -- Périodiques; 519.5
• DOI: 10.1080/01621459.2016.1192544
• Languages: English
• ISSNs: 0162-1459

Abstract

ABSTRACT: This article proposes a novel model of financial prices where (i) prices are discrete; (ii) prices change in continuous time; (iii) a high proportion of price changes are reversed in a fraction of a second. Our model is analytically tractable and directly formulated in terms of the calendar time and price impact curve. The resulting càdlàg price process is a piecewise constant semimartingale with finite activity, finite variation, and no Brownian motion component. We use moment-based estimations to fit four high-frequency futures datasets and demonstrate the descriptive power of our proposed model. This model is able to describe the observed dynamics of price changes over three different orders of magnitude of time intervals. Supplementary materials for this article are available online.