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Modelling the Dynamics of Cross-Sectional Price Functions: an Econometric Analysis of the Bid and Ask Curves of an Automated Exchange

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  • Clive G. Bowsher

    (Nuffield College, Oxford University, UK)

Abstract

Functional Signal plus Noise (FSN) time series models are introduced for the econometric analysis of the dynamics of a large cross-section of prices in which contemporaneous observations are functionally related. A semiparametric FSN model is developed in which a smooth, cubic spline signal function is used to approximate the price curve data. Estimation may then be performed using quasi-maximum likelihood methods based on the Kalman filter. The model is used to provide one of the first studies of the dynamics of the bid and ask curves of an electronic limit order book and enables the comprehensive measurement of the dynamic determinants of traders execution costs. It is found that the differences between the bid and ask curves and their intercepts (i.e. the immediate price impacts of market orders) are well described by covariance stationary processes. The in-sample, 1-step ahead point predictions for these curves perform well and motivate the development of parametric FSN models that take into account the monotonicity of the price curves and can be used to form predictive distributions.

Suggested Citation

  • Clive G. Bowsher, 2004. "Modelling the Dynamics of Cross-Sectional Price Functions: an Econometric Analysis of the Bid and Ask Curves of an Automated Exchange," Economics Papers 2004-W21, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:0421
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    File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/W21/BidAskWP_220904.pdf
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    Cited by:

    1. Bowsher, Clive G. & Meeks, Roland, 2008. "The Dynamics of Economic Functions: Modeling and Forecasting the Yield Curve," Journal of the American Statistical Association, American Statistical Association, vol. 103(484), pages 1419-1437.
    2. Holmberg, Ulf, 2012. "Essays on Credit Markets and Banking," Umeå Economic Studies 840, Umeå University, Department of Economics.
    3. Ziel, Florian & Steinert, Rick, 2016. "Electricity price forecasting using sale and purchase curves: The X-Model," Energy Economics, Elsevier, vol. 59(C), pages 435-454.
    4. Florian Ziel & Rick Steinert, 2015. "Electricity Price Forecasting using Sale and Purchase Curves: The X-Model," Papers 1509.00372, arXiv.org, revised Aug 2016.
    5. Clive G. Bowsher & Roland Meeks, 2006. "High Dimensional Yield Curves: Models and Forecasting," OFRC Working Papers Series 2006fe11, Oxford Financial Research Centre.

    More about this item

    Keywords

    functional time series; bid and ask curves; liquidity; electronic limit order book; cubic spline; state space form; Kalman filter; quasi-maximum likelihood.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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