Modelling High-Frequency Volatility and Liquidity Using Multiplicative Error Models

16 Pages Posted: 1 Nov 2008

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Vahidin Jeleskovic

affiliation not provided to SSRN

Date Written: June 26, 2008

Abstract

In this paper, we study the dynamic interdependencies between high-frequency volatility, liquidity demand as well as trading costs in an electronic limit order book market. Using data from the Australian Stock Exchange we model 1-min squared mid-quote returns, average trade sizes, number of trades and average (excess) trading costs per time interval in terms of a four-dimensional multiplicative error model. The latter is augmented to account also for zero observations. We find evidence for significant contemporaneous relationships and dynamic interdependencies between the individual variables. Liquidity is causal for future volatility but not vice versa. Furthermore, trade sizes are negatively driven by past trading intensities and trading costs. Finally, excess trading costs mainly depend on their own history.

Keywords: Multiplicative error models, volatility, liquidity, high-frequency data

JEL Classification: C13, C32, C52

Suggested Citation

Hautsch, Nikolaus and Jeleskovic, Vahidin, Modelling High-Frequency Volatility and Liquidity Using Multiplicative Error Models (June 26, 2008). Available at SSRN: https://ssrn.com/abstract=1292493 or http://dx.doi.org/10.2139/ssrn.1292493

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Vahidin Jeleskovic

affiliation not provided to SSRN ( email )

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