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Nonlinearities in stochastic clocks: trades and volume as subordinators of electronic markets

Velasco–Fuentes, Rafael and Ng, Wing Lon (2011) 'Nonlinearities in stochastic clocks: trades and volume as subordinators of electronic markets.' Quantitative Finance, 11 (6). pp. 863-881. ISSN 1469-7688

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Abstract

This paper discusses the possibility of recovering normality of asset returns through a stochastic time change, where the appropriate economic time is determined through a simple parametric function of the cumulative number of trades and/or the cumulative volume. The existing literature argues that the re-centred cumulative number of trades could be used as the appropriate stochastic clock of the market under which asset returns are virtually Gaussian. Using tick-data for FTSE-100 futures, we show that normality is not always recovered by conditioning on the re-centred number of trades. However, it can be shown that simply extending the approach to a nonlinear function can provide a better stochastic clock of the market.

Item Type: Article
Uncontrolled Keywords: High frequency; Stochastic time changes; Subordinators; Transaction frequency; Trading volume
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Divisions: Faculty of Science and Health > Computer Science and Electronic Engineering, School of > Centre for Computational Finance and Economic Agents
Depositing User: Jim Jamieson
Date Deposited: 12 Feb 2013 15:14
Last Modified: 12 Feb 2013 15:14
URI: http://repository.essex.ac.uk/id/eprint/5542

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