The Markov Switching Acd Model

Johann Wolfgang Goethe-University, Finance & Accounting Working Paper No. 90

45 Pages Posted: 8 Nov 2002

See all articles by Reinhard Hujer

Reinhard Hujer

University of Frankfurt; IZA Institute of Labor Economics

Sandra Vuletic

Johann Wolfgang Goethe University - University of Frankfurt

Stefan Kokot

Arcor AG & Co. KG

Date Written: April 2002

Abstract

We propose a new framework for modelling time dependence in duration processes on financial markets. The well known autoregressive conditional duration (ACD) approach introduced by Engle and Russell (1998) will be extended in a way that allows the conditional expectation of the duration process to depend on an unobservable stochastic process, which is modelled via a Markov chain. The Markov switching ACD model (MSACD) is a very flexible tool for description and forecasting of financial duration processes. In addition the introduction of an unobservable, discrete valued regime variable can be justified in the light of recent market microstructure theories. In an empirical application we show, that the MSACD approach is able to capture several specific characteristics of inter trade durations while alternative ACD models fail. Furthermore, we use the MSACD to test implications of a sequential trade model.

Keywords: Financial transaction data, autoregressive conditional duration models, nonlinear time series models, finite mixture distributions, Markov switching models, EM algorithm, market microstructure theory

JEL Classification: C22, C25, C41, G14

Suggested Citation

Hujer, Reinhard and Vuletic, Sandra and Kokot, Stefan, The Markov Switching Acd Model (April 2002). Johann Wolfgang Goethe-University, Finance & Accounting Working Paper No. 90. Available at SSRN: https://ssrn.com/abstract=332381 or http://dx.doi.org/10.2139/ssrn.332381

Reinhard Hujer

University of Frankfurt ( email )

Institute for Statistics and Econometrics
60054 Frankfurt
Germany
+49 798 23673 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Sandra Vuletic (Contact Author)

Johann Wolfgang Goethe University - University of Frankfurt ( email )

Institute for Statistics and Econometrics
Mertonstr. 17
60054 Frankfurt
Germany
+49 69 798 22893 (Phone)
+49 69 798 23673 (Fax)

Stefan Kokot

Arcor AG & Co. KG ( email )

Alfred-Herrhausen-Allee 1
Eschborn, 65760
Germany
+49 (0)69 2169 3782 (Phone)
+49 (0)69 2169 5799 (Fax)

HOME PAGE: http://www.arcor.de/

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