Dynamics of trade-by-trade price movements:
Tina Hviid Rydberg, Neil Shephard
In this paper we introduce a decomposition of the joint
distribution of price changes of assets recorded trade-by-trade. Our
decomposition means that we can model the dynamics of price changes using
quite simple and interpretable models which are easily extended in a great
number of directions, including using durations and volume as explanatory
variables. Thus we provide an econometric basis for empirical work on market
microstructure using time series of transactions data.
We use maximum likelihood estimation and testing methods
to assess the fit of the model to a year of IBM stock price data taken from
the New York Stock Exchange.
Appeared in Journal of Financial Econometrics, 2003, 1,
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