Modelling Trade Durations Using Dynamic Logarithmic Component ACD Model with Extended Generalised Inverse Gaussian Distribution

Abstract

This paper proposes a logarithmic version of the two-component ACD (LogCACD) model with no restrictions on the sign of the model parameters while allowing the expected durations to be decomposed into the long- and short-run components to capture the dynamics of these durations. The extended generalised inverse Gaussian (EGIG) distribution is used for the error distribution as its hazard function consists of a roller-coaster shape for certain parameters’ values. An empirical application from the trade durations of International Business Machines stock index has been carried out to investigate this proposed model. Extensive comparisons are carried out to evaluate the modelling and forecasting performances of the proposed model with several benchmark models and different specifications of error distributions. The result reveals that the LogCACDEGIG(1,1) model gives the best in-sample fit based on the Akaike information criterion and other criteria. Furthermore, the estimated parameters obtained through the maximum likelihood estimation confirm the existence of the roller-coaster-shaped hazard function. The examination of LogCACDEGIG(1,1) model also provides the best out-of-sample forecasts evaluated based on the mean square forecast error using the Hansen’s model confidence set. Lastly, different levels of time-at-risk forecasts are provided and tested with Kupiec likelihood ratio test.

Keywords

• autoregressive conditional duration
• two-component model
• extended generalised inverse Gaussian
• hazard function
• time-at-risk