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Estimation of Dynamic Mixed Hitting Time Model Using Characteristic Function Based Moments

Author

Listed:
  • Yogo Purwono

    (Universitas Indonesia)

  • Irwan Adi Ekaputra

    (Universitas Indonesia)

  • Zaäfri Ananto Husodo

    (Universitas Indonesia)

Abstract

We present a characteristic function-based method for the estimation of dynamic mixed hitting time model for duration between events and price changes. The model specifies duration between events as the first time a latent component of multivariate Brownian motion crosses a random boundary. Meanwhile, another (correlated) Brownian component generates the prices. The proposed estimation method facilitates computation and overcomes problems related to the discretization error in the moment conditions and the non-tractability in the joint probability density function. An empirical application using transaction level data on stocks of a large capitalization company traded on the Indonesia Stock Exchange is illustrated. Estimation results suggest that durations and return volatility have strong persistence and, further, there is a negative instantaneous relation between volatility and contemporaneous duration. The impact of considering the causality relation between volatilities and durations on instantaneous volatility estimate are also investigated.

Suggested Citation

  • Yogo Purwono & Irwan Adi Ekaputra & Zaäfri Ananto Husodo, 2018. "Estimation of Dynamic Mixed Hitting Time Model Using Characteristic Function Based Moments," Computational Economics, Springer;Society for Computational Economics, vol. 51(2), pages 295-321, February.
    • Handle: RePEc:kap:compec:v:51:y:2018:i:2:d:10.1007_s10614-017-9692-6
    DOI: 10.1007/s10614-017-9692-6
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    More about this item

    Keywords

    Duration modeling; Mixed hitting time; Market microstructure; Conditional characteristic function;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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