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Haug, Stephan
Czado, Claudia
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Discussion paper // Sonderforschungsbereich 386 der Ludwig-Maximilians-Universität München 440
Considering absolute log returns as a proxy for stochastic volatility, the influence of explanatory variables on absolute log returns of ultra high frequency data is analysed. The irregular time structure and time dependency of the data is captured by utilizing a continuous time ARMA(p,q) process. In particular we propose a mixed effect model for the absolute log returns. Explanatory variable information is used to model the fixed effects, whereas the the error is decomposed in a non-negative Lévy driven continuous time ARMA(p,q) process and a market microstructure noise component. The parameters are estimated in a state space approach. In a small simulation study the performance of the estimators is investigated. We apply our model to IBM trade data and quantify the influence of bid-ask spread and duration on a daily basis. To verify the correlation in irregularly spaced data we use the variogram, known from spatial statistics.
ultra high frequency
mixed effect model
state space
Kalman filter
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Working Paper

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