On the Specification of Duration between Price Changes and the Predictability of High Frequency Returns: An Application to the French CAC 40

Posted: 23 Feb 1999

See all articles by Foort Hamelink

Foort Hamelink

Lombard Odier Asset Management (SA); VU University Amsterdam

Abstract

This paper focuses on the predictability of the duration between intraday price changes of stocks from the CAC 40 using a full year of data, as well as on the predictability of the returns generated by these price changes. It is argued that traders with different time horizons will look at series of price changes recorded at different time intervals. Small price variations will be of higher importance to short terme traders than to longer term traders. We generate various time series to reflect these different time horizons. The duration between these price changes is specified by a model inspired by the Autoregressive Conditional Duration (ACD) model of Engle and Russell (1997). Estimated durations appear to be highly significant in predictiong future returns. These are economically important even after deduction of the bid-ask spread effect and some strategies are found profitable when tested on a 3 months' out-of-sample period. I also introduce threshold versions for the duration and return specifications, where the estimates depend on a "state-of-the-world" defined by thresholds obtained through cluster analysis. Simple clustering is shown to temove a significant part of the dynamics captured by the ACD model.

JEL Classification: G14

Suggested Citation

Hamelink, Foort, On the Specification of Duration between Price Changes and the Predictability of High Frequency Returns: An Application to the French CAC 40. Available at SSRN: https://ssrn.com/abstract=147489

Foort Hamelink (Contact Author)

Lombard Odier Asset Management (SA) ( email )

6 avenue des Morgines
Petit-Lancy
Geneva, 1213
Switzerland

HOME PAGE: http://www.hamelink.com

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
842
PlumX Metrics