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Zero-Inflated Autoregressive Conditional Duration Model for Discrete Trade Durations with Excessive Zeros

Author

Listed:
  • Blasques Francisco

    (VU University Amsterdam and Tinbergen Institute, Amsterdam, The Netherlands)

  • Holý Vladimír

    (Department of Econometrics, Prague University of Economics and Business, Prague, Czechia)

  • Tomanová Petra

    (Department of Econometrics, Prague University of Economics and Business, Prague, Czechia)

Abstract

In finance, durations between successive transactions are usually modeled by the autoregressive conditional duration model based on a continuous distribution omitting zero values. Zero or close-to-zero durations can be caused by either split transactions or independent transactions. We propose a discrete model allowing for excessive zero values based on the zero-inflated negative binomial distribution with score dynamics. This model allows to distinguish between the processes generating split and standard transactions. We use the existing theory on score models to establish the invertibility of the score filter and verify that sufficient conditions hold for the consistency and asymptotic normality of the maximum likelihood of the model parameters. In an empirical study, we find that split transactions cause between 92 % and 98 % of zero and close-to-zero values. Furthermore, the loss of decimal places in the proposed approach is less severe than the incorrect treatment of zero values in continuous models.

Suggested Citation

  • Blasques Francisco & Holý Vladimír & Tomanová Petra, 2024. "Zero-Inflated Autoregressive Conditional Duration Model for Discrete Trade Durations with Excessive Zeros," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(5), pages 673-702.
    • Handle: RePEc:bpj:sndecm:v:28:y:2024:i:5:p:673-702:n:1001
    DOI: 10.1515/snde-2022-0008
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