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Elements of Volatility at High Frequency

Elements of Volatility at High Frequency

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Published by Cervino Institute
Vuorenmaa, Tommi A. (2008). “Elements of Volatility at High Frequency” Doctoral Dissertation, Kansantaloustieteen laitoksen tutkimuksia, No. 111:2008, Helsinki, July 4, 2008

This doctoral dissertation focuses on financial econometrics and, more specifically, on time series methods that can be used to analyze stock market data observed with a very high frequency within a day. The use of such ultra-high-frequency data is common to all three essays of the dissertation. The first essay uses wavelet methods to study the time-varying behavior of scaling laws and long-memory in the five-minute volatility series of Nokia Oyj at the Helsinki Stock Exchange (HSE) around the burst of the “IT-bubble”. The essay is motivated by earlier findings which suggest that different scaling factors may apply to intraday time-scales and to larger timescales. The empirical results confirm the appearance of time varying long-memory and different scaling factors that, for a significant part, can be attributed to an intraday volatility periodicity called the “New York effect”. The second essay investigates modeling the duration between trades in stock markets. Generalizations of standard autoregressive conditional duration models (ACD) are developed to meet needs observed in previous applications of the standard models. According to empirical results based on data from the New York Stock Exchange (NYSE) and the Helsinki Stock Exchange the proposed generalization clearly outperforms the standard models and also performs well in comparison with another recently proposed alternative to the standard models. The third essay studies empirically the effect of decimalization both on volatility and market microstructure noise. Decimalization refers to the change from fractional pricing to decimal pricing that was carried out in the New York Stock Exchange in January, 2001. The main result of the essay is that decimalization decreased observed volatility by reducing noise variance especially for the highly active stocks.
Vuorenmaa, Tommi A. (2008). “Elements of Volatility at High Frequency” Doctoral Dissertation, Kansantaloustieteen laitoksen tutkimuksia, No. 111:2008, Helsinki, July 4, 2008

This doctoral dissertation focuses on financial econometrics and, more specifically, on time series methods that can be used to analyze stock market data observed with a very high frequency within a day. The use of such ultra-high-frequency data is common to all three essays of the dissertation. The first essay uses wavelet methods to study the time-varying behavior of scaling laws and long-memory in the five-minute volatility series of Nokia Oyj at the Helsinki Stock Exchange (HSE) around the burst of the “IT-bubble”. The essay is motivated by earlier findings which suggest that different scaling factors may apply to intraday time-scales and to larger timescales. The empirical results confirm the appearance of time varying long-memory and different scaling factors that, for a significant part, can be attributed to an intraday volatility periodicity called the “New York effect”. The second essay investigates modeling the duration between trades in stock markets. Generalizations of standard autoregressive conditional duration models (ACD) are developed to meet needs observed in previous applications of the standard models. According to empirical results based on data from the New York Stock Exchange (NYSE) and the Helsinki Stock Exchange the proposed generalization clearly outperforms the standard models and also performs well in comparison with another recently proposed alternative to the standard models. The third essay studies empirically the effect of decimalization both on volatility and market microstructure noise. Decimalization refers to the change from fractional pricing to decimal pricing that was carried out in the New York Stock Exchange in January, 2001. The main result of the essay is that decimalization decreased observed volatility by reducing noise variance especially for the highly active stocks.

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Categories:Business/Law, Finance
Published by: Cervino Institute on May 11, 2010
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11/28/2012

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 Research Reports
Kansantaloustieteenlaitoksen tutkimuksia, No. 111:2008
 Dissertationes Oeconomicae
TOMMI A. VUORENMAA
Elements of Volatility at High Frequency
ISBN: 978-952-10-2783-3 (nid.)ISBN: 978-952-10-4821-0 (pdf)ISSN: 0357-3257
 
Foreword
Tommi Vuorenmaa’s doctoral dissertation focuses on financial econometrics and, morespecifically, on time series methods that can be used to analyze stock market data observedwith a very high frequency within a day. The use of such ultra-high-frequency data is commonto all three essays of the dissertation.The first essay uses wavelet methods to study the time-varying behavior of scaling laws andlong-memory in the five-minute volatility series of Nokia Oyj at the Helsinki Stock Exchange(HSE) around the burst of the “IT-bubble”. The essay is motivated by earlier findings whichsuggest that different scaling factors may apply to intraday time-scales and to larger time-scales. The empirical results confirm the appearance of time varying long-memory anddifferent scaling factors that, for a significant part, can be attributed to an intraday volatility periodicity called the “New York effect”. The second essay investigates modeling the duration between trades in stock markets. Generalizations of standard autoregressive conditionalduration models (ACD) are developed to meet needs observed in previous applications of thestandard models. According to empirical results based on data from the New York Stock Exchange (NYSE) and the Helsinki Stock Exchange the proposed generalization clearlyoutperforms the standard models and also performs well in comparison with another recently proposed alternative to the standard models. The third essay studies empirically the effect of decimalization both on volatility and market microstructure noise. Decimalization refers to thechange from fractional pricing to decimal pricing that was carried out in the New York Stock Exchange in January, 2001. The main result of the essay is that decimalization decreasedobserved volatility by reducing noise variance especially for the highly active stocks.This study is part of the research agenda carried out by the Research Unit of EconomicStructure and Growth (RUESG). The aim of RUESG is to conduct theoretical and empiricalresearch with respect to important issues in industrial economics, real option theory, gametheory, organization theory, theory of financial systems as well as problems in labour markets,natural resources, taxation and time series econometrics.RUESG was established at the beginning of 1995 and has been one of the National Centres of Excellence in research selected by the Academy of Finland. It has been financed jointly by theAcademy of Finland, the University of Helsinki, the Yrjö Jahnsson Foundation, Bank of Finland and the Nokia Group. This support is gratefully acknowledged.Helsinki, July 4, 2008Erkki Koskela Pentti SaikkonenAcademy Professor Professor of StatisticsUniversity of Helsinki University of HelsinkiDirector Co-Directo

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