Faculty of Economics and Business Administration Publications Database

Econometric analysis of financial trade processes by discrete mixture duration models

Vuletic, Sandra
Volume: 31
Number: 2
Pages: 635 - 667
Month: February
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 2007
Keywords: Duration models; Mixture models; Market microstructure
Abstract: We propose a new framework for modelling the time dependence in financialdurationprocesses. The pioneering Autoregressive Conditional Duration (ACD) model introduced by Engle and Russell [1998. Autoregressive conditional duration: a new model for irregularly spaced transaction data. Econometrica 66(5), 1127–1162] will be extended in a way that the durationprocess is clouded by an unobservable stochastic process. The idea will be put into practice by the DiscreteMixture ACD framework which provides us with a flexible methodology. It will be established by introducing a discrete-valued latent regime variable which can be justified in the light of recent market microstructure theories. The empirical application demonstrates its ability to capture specific characteristics of intraday transaction durations while alternative approaches fail.