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A multifactor regime-switching model for inter-trade durations in the high-frequency limit order market

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  • Li, Zhicheng
  • Chen, Xinyun
  • Xing, Haipeng

Abstract

Modeling behaviors of inter-trade durations is an important step to understand the market microstructure. Given that most existing models focused on intraday transaction data, we analyze limit order book (LOB) data in a high-frequency (HF) market and find that stocks’ inter-trade durations follow bimodal distributions peaking at levels of second and millisecond. To characterize this empirical property, we develop a multifactor regime-switching duration (MF-RSD) model, in which the modes of inter-trade durations are characterized as regimes and the transitions of regimes are determined by LOB-factor-dependent transition probability matrices. Using the model, we analyze the impact of LOB factors on inter-trade duration dynamics and find that the bimodal phenomenon is caused by the switchings of traders’ trading strategies between market making and price speculation. Our empirical studies show that the MF-RSD model not only produces good in-sample fit but also outperforms some benchmark models in out-of-sample predictions of inter-trade durations.

Suggested Citation

  • Li, Zhicheng & Chen, Xinyun & Xing, Haipeng, 2023. "A multifactor regime-switching model for inter-trade durations in the high-frequency limit order market," Economic Modelling, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:ecmode:v:118:y:2023:i:c:s0264999322003194
    DOI: 10.1016/j.econmod.2022.106082
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    More about this item

    Keywords

    Duration model; Regime switching; Market microstructure; High-frequency data;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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