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The Endo-Exo Problem in High Frequency Financial Price Fluctuations and Rejecting Criticality

Author

Listed:
  • Spencer Wheatley

    (ETH Zurich)

  • Alexander Wehrli

    (ETH Zurich)

  • Didier Sornette

    (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute)

Abstract

The endo-exo problem lies at the heart of statistical identification in many fields of science, and is often plagued by spurious strong-and-long memory due to improper treatment of trends, shocks and shifts in the data. A class of models that has shown to be useful in discerning exogenous and endogenous activity is the Hawkes process. This class of point processes has enjoyed great recent popularity and rapid development within the quantitative finance literature, with particular focus on the study of market microstructure and high frequency price fluctuations. We show that there are important lessons from older fields like time series and econometrics that should also be applied in financial point process modelling. In particular, we emphasize the importance of appropriately treating trends and shocks for the identification of the strength and length of memory in the system. We exploit the powerful Expectation Maximization (EM) algorithm and objective statistical criteria (BIC) to select the flexibility of the deterministic background intensity. With these methods, we strongly reject the hypothesis that the considered financial markets are critical at univariate and bivariate microstructural levels.

Suggested Citation

  • Spencer Wheatley & Alexander Wehrli & Didier Sornette, 2018. "The Endo-Exo Problem in High Frequency Financial Price Fluctuations and Rejecting Criticality," Swiss Finance Institute Research Paper Series 18-57, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1857
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    Cited by:

    1. Carlo Campajola & Domenico Di Gangi & Fabrizio Lillo & Daniele Tantari, 2020. "Modelling time-varying interactions in complex systems: the Score Driven Kinetic Ising Model," Papers 2007.15545, arXiv.org, revised Aug 2021.
    2. Jean-Philippe Bouchaud, 2024. "The Self-Organized Criticality Paradigm in Economics & Finance," Papers 2407.10284, arXiv.org, revised Sep 2024.
    3. Schatz, Michael & Wheatley, Spencer & Sornette, Didier, 2022. "The ARMA Point Process and its Estimation," Econometrics and Statistics, Elsevier, vol. 24(C), pages 164-182.

    More about this item

    Keywords

    mid-price changes; trade times; Hawkes process; endogeneity; criticality; Expectation- Maximization; BIC; non-stationarity; ARMA point process; spurious inference; external shocks;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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