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Econometric Analysis of Discrete-Valued Irregularly-Spaced Financial Transactions Data Using a New Autoregressive Conditional Multinomial Model

33 Pages Posted: 14 Aug 1998  

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: April 1998

Abstract

This paper proposes a new approach to modeling financial transactions data. A model for discrete valued time series is introduced in the context of generalized linear models. Since the model specifies probabilities of return outcomes conditional on both the previous state and the historic distribution, we call the it the Autoregressive Conditional Multinomial (ACM) model. Recognizing that prices are observed only at transactions, the process is interpreted as a marked point process. The ACD model proposed in Engle and Russell (1998) allows for joint modeling of the price transition probabilities and the arrival times of the transactions. The transition probabilities are formulated to allow general types of duration dependence. Estimation and testing are based on Maximum Likelihood methods. The data are IBM transactions from the TORQ dataset. Variations of the model allow for volume and spreads to impact the conditional distribution of price changes. Impulse response studies show the long run price impact of a transaction can be very sensitive to volume but is less sensitive to the spread and transaction rate.

JEL Classification: C22, C25

Suggested Citation

Russell, Jeffrey R. and Engle, Robert F., Econometric Analysis of Discrete-Valued Irregularly-Spaced Financial Transactions Data Using a New Autoregressive Conditional Multinomial Model (April 1998). CRSP Working Paper No. 470; University of California at San Diego Working Paper No. 98-10. Available at SSRN: https://ssrn.com/abstract=106528 or http://dx.doi.org/10.2139/ssrn.106528

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-0720 (Phone)
773-702-0458 (Fax)

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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