Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes

36 Pages Posted: 19 Nov 2010 Last revised: 8 Aug 2012

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research

Peter Malec

University of Cambridge - Faculty of Economics

Melanie Schienle

Humboldt University of Berlin - School of Business and Economics

Date Written: July 24, 2012

Abstract

We propose a novel approach to model serially dependent positive-valued variables which realize a non-trivial proportion of zero outcomes. This is a typical phenomenon in financial time series observed at high frequencies, such as cumulated trading volumes. We introduce a flexible point-mass mixture distribution and develop a semiparametric specification test explicitly tailored for such distributions. Moreover, we propose a new type of multiplicative error model (MEM) based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations. Applying the proposed model to high-frequency cumulated trading volumes of both liquid and illiquid NYSE stocks, we show that the model captures the dynamic and distributional properties of the data well and is able to correctly predict future distributions.

Keywords: High-Frequency Data, Point-Mass Mixture, Multiplicative Error Model, Excess Zeros, Semiparametric Specification Test, Market Microstructure

JEL Classification: C22, C25, C14, C16, C51

Suggested Citation

Hautsch, Nikolaus and Malec, Peter and Schienle, Melanie, Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes (July 24, 2012). Available at SSRN: https://ssrn.com/abstract=1711810 or http://dx.doi.org/10.2139/ssrn.1711810

Nikolaus Hautsch

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

Kolingasse 14
Vienna, A-1090
Austria

Peter Malec (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Melanie Schienle

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

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