Modeling Intraday Momentum and Reversal by a Parsimonious Diffusion Process

37 Pages Posted: 17 Jun 2019

See all articles by Shiqing Ling

Shiqing Ling

Hong Kong University of Science & Technology (HKUST)

Zhenya Liu

Renmin University of China; CERGAM, Aix-Marseille University

Shixuan Wang

University of Reading - Department of Economics

Date Written: June 6, 2019

Abstract

We extend the double-well potential process to a three-parameter version in order to model intraday price dynamics, with a focus on the intraday momentum and reversal. The proposed process has a parsimonious form of three parameters controlling momentum, reversal, and volatility respectively. By using different combinations of parameter values, the process can accommodate two different intraday patterns: i) there is no new information and intraday price undertakes mean-reverting pattern due to “noise traders”; ii) there is new information released and the intraday price experiences a momentum possibly followed by a reversal due to overreaction. Estimation methods are developed under both long-span asymptotics and in-fill asymptotics along with a simulation study for the finite sample properties. An empirical illustration is provided by using three intraday-frequencies data of Apple Inc.

Keywords: Double-well Potential; Fokker-Planck Equation; Intraday Price Dynamics; In-fill Asymptotics; Overreaction

JEL Classification: C13; C22; C58; G40

Suggested Citation

Ling, Shiqing and Liu, Zhenya and Wang, Shixuan, Modeling Intraday Momentum and Reversal by a Parsimonious Diffusion Process (June 6, 2019). Available at SSRN: https://ssrn.com/abstract=3400384 or http://dx.doi.org/10.2139/ssrn.3400384

Shiqing Ling

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Zhenya Liu (Contact Author)

Renmin University of China ( email )

School of Finance
Beijing, Beijing 100872
China

CERGAM, Aix-Marseille University ( email )

Aix-Marseille University
3 Avenue Robert Schuman,
Aix-en-Provence, 13628
France
0781668685 (Phone)

Shixuan Wang

University of Reading - Department of Economics ( email )

Reading, RG6 6AA
United Kingdom

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