In this paper we propose a new stochastic model based on a generalization of semi-Markov chains for studying the high frequency price dynamics of traded stocks. We assume that the financial returns are described by a weighted-indexed semi-Markov chain model. We show, through Monte Carlo simulations, that the model is able to reproduce important stylized facts of financial time series such as the first-passage-time distributions and the persistence of volatility. The model is applied to data from the Italian and German stock markets from 1 January 2007 until the end of December 2010.
Weighted-indexed semi-Markov models for modeling financial returns
D'Amico, Guglielmo;Petroni, Filippo
2012-01-01
Abstract
In this paper we propose a new stochastic model based on a generalization of semi-Markov chains for studying the high frequency price dynamics of traded stocks. We assume that the financial returns are described by a weighted-indexed semi-Markov chain model. We show, through Monte Carlo simulations, that the model is able to reproduce important stylized facts of financial time series such as the first-passage-time distributions and the persistence of volatility. The model is applied to data from the Italian and German stock markets from 1 January 2007 until the end of December 2010.File in questo prodotto:
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