Non-monotonic hazard functions and the autoregressive conditional duration model

This paper shows that the monotonicity of the conditional hazard in traditional ACD models is both econometrically important and empirically invalid. To counter this problem we introduce a more flexible parametric model which is easy to fit and performs well both in simulation studies and in practice. In an empirical application to NYSE price duration processes, we show that non-monotonic conditional hazard functions are indicated for all stocks. Recently proposed specification tests for financial duration models clearly reject the standard ACD models, whereas the results for the new model are quite favorable.

[1]  Jeffrey R. Russell,et al.  Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data , 1998 .

[2]  Nikolaus Hautsch,et al.  Volatility Estimation on the Basis of Price Intensities , 2001 .

[3]  James D. Hamilton,et al.  A Model for the Federal Funds Rate Target , 1999 .

[4]  Anthony S. Tay,et al.  Evaluating Density Forecasts , 1997 .

[5]  Pierre Giot,et al.  The logarithmic ACD model: an application to market microstructure and NASDAQ , 1997 .

[6]  Asger Lunde,et al.  A Generalized Gamma Autoregressive Conditional Duration Model , 1999 .

[7]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[8]  P. Jacobs,et al.  A mixed autoregressive-moving average exponential sequence and point process (EARMA 1,1) , 1977, Advances in Applied Probability.

[9]  Tony Lancaster,et al.  The Econometric Analysis of Transition Data. , 1992 .

[10]  Daniel B. Nelson.  CONDITIONAL HETEROSKEDASTICITY IN ASSET RETURNS: A NEW APPROACH , 1991 .

[11]  Robert E. Verrecchia,et al.  Constraints on short-selling and asset price adjustment to private information , 1987 .

[12]  M. Rosenblatt.  Remarks on a Multivariate Transformation , 1952 .

[13]  Robert F. Engle,et al.  The Econometrics of Ultra-High Frequency Data , 1996 .

[14]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[15]  D. Vere-Jones,et al.  Some examples of statistical estimation applied to earthquake data , 1982 .

[16]  Eric Ghysels,et al.  GARCH for Irregularly Spaced Financial Data: The ACD-GARCH Model , 1998 .

[17]  Shih-Ping Han.  A globally convergent method for nonlinear programming , 1975 .

[18]  David Easley,et al.  Liquidity, Information, and Infrequently Traded Stocks , 1996 .

[19]  Izhak Rubin,et al.  Regular point processes and their detection , 1972, IEEE Trans. Inf. Theory.

[20]  A. J. Lawrance,et al.  The Exponential Autoregressive‐Moving Average Earma(P,Q) Process , 1980 .

[21]  N. Shephard.  Partial non-Gaussian state space , 1994 .

[22]  Jeffrey R. Russell.  Econometric Modeling of Multivariate Irregularly-Spaced High-Frequency Data , 2000 .

[23]  Joel Hasbrouck,et al.  Trades, quotes, inventories, and information , 1988 .

[24]  Daniel B. Nelson,et al.  Inequality Constraints in the Univariate GARCH Model , 1992 .

[25]  D. P. Gaver,et al.  First-order autoregressive gamma sequences and point processes , 1980, Advances in Applied Probability.

[26]  Joachim Grammig,et al.  Nonparametric specification tests for conditional duration models , 2005 .

[27]  H. Wold.  On stationary point processes and Markov chains , 1948 .

[28]  Pierre Giot,et al.  Time transformations, intraday data and volatility models , 2000 .

[29]  A. Hawkes.  Spectra of some self-exciting and mutually exciting point processes , 1971 .

[30]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[31]  N. Shephard,et al.  Stochastic Volatility: Likelihood Inference And Comparison With Arch Models , 1996 .

[32]  Song-xi Chen,et al.  Probability Density Function Estimation Using Gamma Kernels , 2000 .

[33]  Maureen O'Hara,et al.  Market Microstructure Theory , 1995 .

[34]  Ruey S. Tsay,et al.  A nonlinear autoregressive conditional duration model with applications to financial transaction data , 2001 .

[35]  D. Cox,et al.  The statistical analysis of series of events , 1966 .

[36]  Jeffrey R. Russell,et al.  Econometric Analysis of Discrete-Valued Irregularly-Spaced Financial Transactions Data Using a New Autoregressive Conditional Multinomial Model , 1998 .