A micro-to-macro approach to returns, volumes and waiting times

TL;DR

This paper introduces a multivariate semi-Markov model incorporating price returns, trading volumes, and waiting times, capturing their dependence structure with copulas, validated through empirical data and simulations from the Italian stock market.

Contribution

It presents a novel multivariate semi-Markov model that integrates multiple financial variables and their dependencies, extending previous models in financial econometrics.

Findings

Model accurately reproduces empirical dependencies among variables.

Monte Carlo simulations validate the model against real market data.

The approach enhances understanding of trading dynamics in financial markets.

Abstract

Fundamental variables in financial market are not only price and return but a very important role is also played by trading volumes. Here we propose a new multivariate model that takes into account price returns, logarithmic variation of trading volumes and also waiting times, the latter to be intended as the time interval between changes in trades, price, and volume of stocks. Our approach is based on a generalization of semi-Markov chains where an endogenous index process is introduced. We also take into account the dependence structure between the above mentioned variables by means of copulae. The proposed model is motivated by empirical evidences which are known in financial literature and that are also confirmed in this work by analysing real data from Italian stock market in the period August 2015 - August 2017. By using Monte Carlo simulations, we show that the model reproduces all these empirical evidences.