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Inventory Effects on Daily Returns in Financial Markets

Author

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  • Andreas Krause

    (University of Bath, School of Management, Bath BA2 7AY, Great Britain, UK)

Abstract

In this paper we investigate the properties of daily returns arising from inventory effects. We therefore use the well established framework of inventory-based models from market microstructure theory. It is shown using simulation studies that from this model daily returns exhibit excess volatility, negative first-order autocovariances and the volatility has a positive first-order autocovariance, which is consistent with a GARCH-process. An empirical investigation shows that a substantial part of the properties of daily returns in stock market data can be explained by inventory effects.

Suggested Citation

  • Andreas Krause, 2003. "Inventory Effects on Daily Returns in Financial Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(07), pages 739-765.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:07:n:s0219024903002171
    DOI: 10.1142/S0219024903002171
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    References listed on IDEAS

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    1. Engle, Robert F. & White (the late), Halbert (ed.), 1999. "Cointegration, Causality, and Forecasting: Festschrift in Honour of Clive W. J. Granger," OUP Catalogue, Oxford University Press, number 9780198296836.
    2. Aki-Hiro Sato & Hideki Takayasu, 2001. "Derivation of ARCH(1) process from market price changes based on deterministic microscopic multi-agent," Papers cond-mat/0104313, arXiv.org.
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