Modelling Financial Transaction Price Movements: A Dynamic Integer Count Data Model

Posted: 15 Jun 2006

See all articles by Roman Liesenfeld

Roman Liesenfeld

University of Cologne, Department of Economics

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Winfried Pohlmeier

University of Konstanz - Department of Economics & Center of Finance & Econometrics (CoFE)

Abstract

In this paper we develop a dynamic model for integer counts to capture fundamental properties of financial prices at the transaction level. Our model relies on an autoregressive multinomial component for the direction of the price change and a dynamic count data component for the size of the price changes. Since the model is capable of capturing a wide range of discrete price movements it is particularly suited for financial markets where the trading intensity is moderate or low.

We present the model at work by applying it to transaction data of two shares traded at the NYSE traded over a period of one trading month. We show that the model is well suited to test some theoretical implications of the market microstructure theory on the relationship between price movements and other marks of the trading process. Based on density forecast methods modified for the case of discrete random variables we show that our model is capable to explain large parts of the observed distribution of price changes at the transaction level.

Keywords: financial transaction prices, autoregressive conditional multinomial model, GLARMA, count data, market microstructure effects

JEL Classification: C22,C25,G10

Suggested Citation

Liesenfeld, Roman and Nolte, Ingmar and Pohlmeier, Winfried, Modelling Financial Transaction Price Movements: A Dynamic Integer Count Data Model. Empirical Economics, Vol. 30, No. 4, pp. 795-825, 2006. Available at SSRN: https://ssrn.com/abstract=908266

Roman Liesenfeld

University of Cologne, Department of Economics ( email )

Albertus-Magnus-Platz
D-50931 Köln
Germany

Ingmar Nolte (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Winfried Pohlmeier

University of Konstanz - Department of Economics & Center of Finance & Econometrics (CoFE) ( email )

Konstanz, D-78457
Germany

HOME PAGE: http://econometrics.wiwi.uni-konstanz.de

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