A Time Series Model of Futures Time and Sales Data
Posted: 24 Apr 1998
This paper presents a stochastic model of futures returns that explicitly captures the effect of the nonrecording of zero return transactions on the time series properties of Time and Series data. The model extends existing nontrading models by incorporating a generalized first-order Markov process for trade initiation and by including a bid/ask spread component in the return process. As application of the model to the Treasury Bond future shows that the model can generate an autocorrelation structure consistent with the observed time series for a range of plausible parameter values. Further analysis supports the conjecture that futures market makers may prefer to provide liquidity when offsetting transactions are available. The model contributes to the examination of the microstructure of futures markets.
JEL Classification: G13
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