The Latent Factor VAR Model: Testing for a Common Component in the Intraday Trading Process

University of Copenhagen Working Paper No. 2005/03

37 Pages Posted: 14 Jun 2005

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Date Written: March 22, 2005

Abstract

In this paper, we propose a framework for the modelling of multivariate dynamic processes which are driven by an unobservable common autoregressive component. Economically motivated by the mixture-of-distribution hypothesis, we model the multivariate intraday trading process of return volatility, volume and trading intensity by a VAR model that is augmented by a joint latent factor serving as a proxy for the unobserved information flow. The model is estimated by simulated maximum likelihood using efficient importance sampling techniques. Analyzing intraday data from the NYSE, we find strong empirical evidence for the existence of an underlying persistent component as an important driving force of the trading process. It is shown that the inclusion of the latent factor clearly improves the goodness-of-fit of the model as well as its dynamical and distributional properties.

Keywords: Observation vs. parameter driven dynamics, mixture-of-distribution hypothesis, VAR model

JEL Classification: C15, C32, C52

Suggested Citation

Hautsch, Nikolaus, The Latent Factor VAR Model: Testing for a Common Component in the Intraday Trading Process (March 22, 2005). University of Copenhagen Working Paper No. 2005/03. Available at SSRN: https://ssrn.com/abstract=741328 or http://dx.doi.org/10.2139/ssrn.741328

Nikolaus Hautsch (Contact Author)

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

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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