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.

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