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Mixed effect models for absolute log returns of ultra high frequency data

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  • Stephan Haug
  • Claudia Czado

Abstract

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 class for the absolute log returns. Explanatory variable information is used to model the fixed effects, whereas 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. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Stephan Haug & Claudia Czado, 2006. "Mixed effect models for absolute log returns of ultra high frequency data," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 22(3), pages 243-267, May.
    • Handle: RePEc:wly:apsmbi:v:22:y:2006:i:3:p:243-267
    DOI: 10.1002/asmb.614
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