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Information Flow Dependence In Financial Markets

Author

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  • MARKUS MICHAELSEN

    (Faculty of Business, Economics and Social Sciences, Universität Hamburg, Von-Melle-Park 5, 20146 Hamburg, Germany)

Abstract

In response to empirical evidence, we propose a continuous-time model for multivariate asset returns with a two-layered dependence structure. The price process is subject to multivariate information arrivals driving the market activity modeled by nondecreasing pure-jump Lévy processes. A Lévy copula determines the jump dependence and allows for a generic multivariate information flow with a flexible structure. Conditional on the information flow, asset returns are jointly normal. Within this setup, we provide an estimation framework based on maximum simulated likelihood. We apply novel multivariate models to equity data and obtain estimates which meet an economic intuition with respect to the two-layered dependence structure.

Suggested Citation

  • Markus Michaelsen, 2020. "Information Flow Dependence In Financial Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(05), pages 1-34, August.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:05:n:s0219024920500296
    DOI: 10.1142/S0219024920500296
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    Cited by:

    1. M. Gardini & P. Sabino & E. Sasso, 2021. "The Variance Gamma++ Process and Applications to Energy Markets," Papers 2106.15452, arXiv.org.
    2. Matteo Gardini & Piergiacomo Sabino & Emanuela Sasso, 2021. "Correlating Lévy processes with self-decomposability: applications to energy markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1253-1280, December.

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