On the dependence structure of the trade/no trade sequence of illiquid assets

TL;DR

This paper investigates the dependence structure of trade/no trade sequences in illiquid stocks, accounting for variable zero-return probabilities, and demonstrates the approach's effectiveness through simulations and real market data analysis.

Contribution

It introduces a flexible framework for analyzing trade/no trade dependence in illiquid stocks, accommodating both constant and time-varying zero returns probabilities.

Findings

Long-run effects can be falsely detected if zero returns probability varies.

The proposed methods effectively analyze real market data.

Monte Carlo simulations validate the approach.

Abstract

In this paper, we propose to consider the dependence structure of the trade/no trade categorical sequence of individual illiquid stocks returns. The framework considered here is wide as constant and time-varying zero returns probability are allowed. The ability of our approach in highlighting illiquid stock's features is underlined for a variety of situations. More specifically, we show that long-run effects for the trade/no trade categorical sequence may be spuriously detected in presence of a non-constant zero returns probability. Monte Carlo experiments, and the analysis of stocks taken from the Chilean financial market, illustrate the usefulness of the tools developed in the paper.