Drift in transaction-level asset price models

DOI10.1111/JTSA.12235zbMATH Open1378.62125arXiv1211.5372OpenAlexW1491723331MaRDI QIDQ5357989FDOQ5357989

Authors: Wen Cao, Clifford Hurvich, Philippe Soulier 

Publication date: 18 September 2017

Published in: Journal of Time Series Analysis (Search for Journal in Brave)

Abstract: We study the effect of drift in pure-jump transaction-level models for asset prices in continuous time, driven by point processes. The drift is as-sumed to arise from a nonzero mean in the efficient shock series. It follows that the drift is proportional to the driving point process itself, i.e. the cumulative number of transactions. This link reveals a mechanism by which properties of intertrade durations (such as heavy tails and long memory) can have a strong impact on properties of average returns, thereby poten-tially making it extremely difficult to determine long-term growth rates or to reliably detect an equity premium. We focus on a basic univariate model for log price, coupled with general assumptions on the point process that are satisfied by several existing flexible models, allowing for both long mem-ory and heavy tails in durations. Under our pure-jump model, we obtain the limiting distribution for the suitably normalized log price. This limiting distribution need not be Gaussian, and may have either finite variance or infinite variance. We show that the drift can affect not only the limiting dis-tribution for the normalized log price, but also the rate in the corresponding normalization. Therefore, the drift (or equivalently, the properties of dura-tions) affects the rate of convergence of estimators of the growth rate, and can invalidate standard hypothesis tests for that growth rate. As a rem-edy to these problems, we propose a new ratio statistic which behaves more

Full work available at URL: https://arxiv.org/abs/1211.5372

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zbMATH Keywords

heavy tailssubsamplinglong memorygrowth ratesdurations

Mathematics Subject Classification ID

Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Point processes (e.g., Poisson, Cox, Hawkes processes) (60G55) Applications of statistics to actuarial sciences and financial mathematics (62P05) Central limit and other weak theorems (60F05)

Cited In (6)

• Limit laws in transaction-level asset price models
• Estimation of \(\alpha, \beta\) and portfolio weights in a pure-jump model with long memory in volatility
• Testing stationarity of the detrended price return in stock markets
• Reassessing the evidence on factor and portfolio premia
• A Pure-Jump Transaction-Level Price Model Yielding Cointegration
• Review of statistical approaches for modeling high-frequency trading data

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