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Introduction to High-Frequency Finance - Richard Olsen

Introduction to High-Frequency Finance

Hardcover Published: 14th May 2001
ISBN: 9780122796715
Number Of Pages: 383

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Liquid markets generate hundreds or thousands of ticks (the minimum change in price a security can have, either up or down) every business day. Data vendors such as Reuters transmit more than 275,000 prices per day for foreign exchange spot rates alone. Thus, high-frequency data can be a fundamental object of study, as traders make decisions by observing high-frequency or tick-by-tick data. Yet most studies published in financial literature deal with low frequency, regularly spaced data. For a variety of reasons, high-frequency data are becoming a way for understanding market microstructure. This book discusses the best mathematical models and tools for dealing with such vast amounts of data.
This book provides a framework for the analysis, modeling, and inference of high frequency financial time series. With particular emphasis on foreign exchange markets, as well as currency, interest rate, and bond futures markets, this unified view of high frequency time series methods investigates the price formation process and concludes by reviewing techniques for constructing systematic trading models for financial assets.

Industry Reviews

Prepublication Praise: "The authors have shaped the field of high-frequency data in finance; the text provides an excellent summary of their pioneering work." --PAUL EMBRECHTS, Professor of Mathematics, ETH Zurich "An Introduction to High-Frequency Finance by the research team from Olsen & Associates is an amazing presentation of their work over the last decade and a half examining high-frequency, primarily currency, data. The volume includes details of data handling, filtering methods, scaling procedures, volatility models, automatic market making and trading rules that for many years were proprietary information. I highly recommend the book for anyone using tick data." --ROBERT ENGLE, Department of Finance, Stern School, NYU and Department of Economics, University of California, San Diego "At long last, the study of financial prices is moving beyond convenient oversimplifications. For providing much of the best data and an indispensable bridge between the financial and academic communities, this flowering is deeply indebted to the group led by Dr. Richard Olsen. This group and its alumni have also analyzed their own data. That work, which I often quote, has now been collected and extended in a book. I shall wear it out by constant use and it is a delight to recommend it to the emerging rational finance community." --BENOIT B. MANDELBROT, Sterling Professor of Mathematical Sciences, Yale University

List of Figuresp. xv
List of Tablesp. xix
Prefacep. xxi
Acknowledgmentsp. xxiii
Markets: The Source of High-Frequency Datap. 1
Methodology of High-Frequency Researchp. 2
Data Frequency and Market Informationp. 3
New Levels of Significancep. 6
Interrelating Different Time Scalesp. 8
Markets and Data
General Remarks on Markets and Data Typesp. 10
Spot Marketsp. 11
Futures Marketsp. 12
Option Marketsp. 13
Foreign Exchange Marketsp. 13
Structure of the Foreign Exchange Spot Marketp. 15
Synthetic Cross Ratesp. 19
Multiple Contributor Effectsp. 19
Over-the-Counter Interest Rate Marketsp. 20
Spot Interest Ratesp. 21
Foreign Exchange Forward Ratesp. 22
Interest Rate Futuresp. 23
General Description of Interest Rate Futuresp. 23
Implied Forward Interest Rates and Yield Curvesp. 25
Bond Futures Marketsp. 28
Bonds and Bond Futuresp. 28
Rollover Schemesp. 29
Commodity Futuresp. 31
Equity Marketsp. 32
Time Series of Interest
Time Series and Operatorsp. 34
Variables in Homogeneous Time Seriesp. 37
Interpolationp. 37
Pricep. 38
Returnp. 40
Realized Volatilityp. 41
Bid-Ask Spreadp. 45
Tick Frequencyp. 46
Other Variablesp. 46
Overlapping Returnsp. 47
Convolution Operatorsp. 51
Notation Used for Time Series Operatorsp. 53
Linear Operator and Kernelsp. 54
Build-Up Time Intervalp. 56
Homogeneous Operators and Robustnessp. 58
Exponential Moving Average (EMA)p. 59
The Iterated EMA Operatorp. 59
Moving Average (MA)p. 61
Moving Norm, Variance, and Standard Deviationp. 63
Differentialp. 64
Derivative and [gamma]-Derivativep. 66
Volatilityp. 68
Standardized Time Series, Moving Skewness, and Kurtosisp. 71
Moving Correlationp. 71
Windowed Fourier Transformp. 74
Microscopic Operatorsp. 76
Backward Shift and Time Translation Operatorsp. 77
Regular Time Series Operatorp. 77
Microscopic Return, Difference, and Derivativep. 78
Microscopic Volatilityp. 79
Tick Frequency and Activityp. 79
Adaptive Data Cleaning
Introduction: Using a Filter to Clean the Datap. 82
Data and Data Errorsp. 84
Time Series of Ticksp. 84
Data Error Typesp. 85
General Overview of the Filterp. 86
The Functionality of the Filterp. 86
Overview of the Filtering Algorithm and Its Structurep. 88
Basic Filtering Elements and Operationsp. 88
Credibility and Trust Capitalp. 89
Filtering of Single Scalar Quotes: The Level Filterp. 91
Pair Filtering: The Credibility of Returnsp. 93
Computing the Expected Volatilityp. 96
Pair Filtering: Comparing Quote Originsp. 98
A Time Scale for Filteringp. 100
The Scalar Filtering Windowp. 103
Entering a New Quote in the Scalar Filtering Windowp. 104
The Trust Capital of a New Scalar Quotep. 104
Updating the Scalar Windowp. 106
Dismissing Quotes from the Scalar Windowp. 107
Updating the Statistics with Credible Scalar Quotesp. 108
A Second Scalar Window for Old Valid Quotesp. 108
The Full-Quote Filtering Windowp. 109
Quote Splitting Depending on the Instrument Typep. 110
The Basic Validity Testp. 110
Transforming the Filtered Variablep. 112
Univariate Filteringp. 113
The Results of Univariate Filteringp. 114
Filtering in Historical and Real-Time Modesp. 115
Choosing the Filter Parametersp. 116
Special Filter Elementsp. 116
Multivariate Filtering: Filtering Sparse Datap. 116
Behavior and Effects of the Data Filterp. 118
Basic Stylized Facts
Introductionp. 121
Price Formation Processp. 123
Negative First-Order Autocorrelation of Returnsp. 123
Discreteness of Quoted Spreadsp. 125
Short-Term Triangular Arbitragep. 127
Institutional Structure and Exogeneous Impactsp. 127
Institutional Frameworkp. 127
Positive Impact of Official Interventionsp. 129
Mixed Effect of Newsp. 129
Distributional Properties of Returnsp. 132
Finite Variance, Symmetry and Decreasing Fat-Tailednessp. 132
The Tail Index of Return Distributionsp. 135
Extreme Risks in Financial Marketsp. 144
Scaling Lawsp. 147
Empirical Evidencep. 147
Distributions and Scaling Lawsp. 151
A Simple Model of the Market Maker Biasp. 154
Limitations of the Scaling Lawsp. 158
Autocorrelation and Seasonalityp. 160
Autocorrelations of Returns and Volatilityp. 161
Seasonal Volatility: Across Markets for OTC Instrumentsp. 163
Seasonal Volatility: U-Shaped for Exchange Traded Instrumentsp. 167
Deterministic Volatility in Eurofutures Contractsp. 169
Bid-Ask Spreadsp. 170
Modeling Seasonal Volatility
Introductionp. 174
A Model of Market Activityp. 175
Seasonal Patterns of the Volatility and Presence of Marketsp. 175
Modeling the Volatility Patterns with an Alternative Time Scale and an Activity Variablep. 176
Market Activity and Scaling Lawp. 177
Geographical Components of Market Activityp. 178
A Model of Intraweek Market Activityp. 179
Interpretation of the Activity Modeling Resultsp. 183
A New Business Time Scale (v-Scale)p. 188
Definition of the v-Scalep. 188
Adjustments of the v-Scale Definitionp. 189
A Ratio Test for the v-Scale Qualityp. 192
Filtering Intraday Seasonalities with Waveletsp. 193
Realized Volatility Dynamics
Introductionp. 197
The Bias of Realized Volatility and Its Correctionp. 198
Conditional Heteroskedasticityp. 204
Autocorrelation of Volatility in v-Timep. 204
Short and Long Memoryp. 207
The Heterogeneous Market Hypothesisp. 209
Volatilities of Different Time Resolutionsp. 210
Asymmetric Lead-Lag Correlation of Volatilitiesp. 211
Conditional Predictabilityp. 215
Volatility Processes
Introductionp. 219
Intraday Volatility and GARCH Modelsp. 221
Parameter Estimation of GARCH Modelsp. 222
Temporal Aggregation of GARCH Modelsp. 224
Estimates of GARCH(1,1) for Various Frequenciesp. 226
Modeling Heterogeneous Volatilitiesp. 231
The HARCH Modelp. 231
HARCH and Market Componentsp. 234
Generalization of the Process Equationp. 237
EMA-HARCH Modelp. 237
Estimating HARCH and EMA-HARCH Modelsp. 239
HARCH in Interest Rate Modelingp. 242
Forecasting Short-Term Volatilityp. 243
A Framework to Measure the Forecasting Performancep. 243
Performance of ARCH-Type Modelsp. 246
Forecasting Risk and Return
Introduction to Forecastingp. 248
Forecasting Volatility for Value-at-Riskp. 250
Three Simple Volatility Forecasting Modelsp. 250
Choosing the Best Volatility Forecasting Modelp. 254
Forecasting Returns over Multiple Time Horizonsp. 255
Intrinsic Timep. 255
Model Structurep. 256
A Linear Combination of Nonlinear Indicatorsp. 256
Moving Averages, Momenta, and Indicatorsp. 257
Continuous Coefficient Updatep. 259
Measuring Forecast Qualityp. 261
Appropriate Measures of Forecast Accuracyp. 262
Empirical Results for the Multi-Horizon Modelp. 263
Forecast Effectiveness in Intraday Horizonsp. 264
Correlation and Multivariate Risk
Introductionp. 268
Estimating the Dependence of Financial Time Seriesp. 269
Covolatility Weightingp. 270
Formulation of an Adjusted Correlation Measurep. 272
Monte Carlo and Empirical Testsp. 274
Stability of Return Correlationsp. 277
Correlation Variations over Timep. 278
The Exponential Memory of Return Correlationsp. 282
Correlation Behavior at High Data Frequenciesp. 287
Conclusionsp. 293
Trading Models
Introductionp. 295
Real-Time Trading Strategiesp. 297
The Trading Model and Its Data-Processing Environmentp. 299
Simulated Traderp. 303
Risk Sensitive Performance Measuresp. 304
X[subscript eff]: A Symmetric Effective Returns Measurep. 305
R[subscript eff]: An Asymmetric Effective Returns Measurep. 307
Trading Model Algorithmsp. 309
An Example of a Trading Modelp. 310
Model Design with Genetic Programmingp. 311
Optimization and Testing Proceduresp. 317
Robust Optimization with Genetic Algorithmsp. 317
Testing Proceduresp. 321
Statistical Study of a Trading Modelp. 323
Heterogeneous Real-Time Trading Strategiesp. 323
Price-Generation Processes and Trading Modelsp. 328
Trading Model Portfoliosp. 338
Currency Risk Hedgingp. 340
The Hedging Ratio and the "Neutral Point"p. 343
Risk/Return of an Overlay with Static and Dynamic Positionsp. 344
Dynamic Hedging with Exposure Constraintsp. 345
Concluding Remarksp. 346
Toward a Theory of Heterogeneous Markets
Definition of Efficient Marketsp. 349
Dynamic Markets and Relativistic Effectsp. 350
Impact of the New Technologyp. 352
Zero-Sum Game or Perpetuum Mobile?p. 353
Discussion of the Conventional Definitionp. 354
An Improved Definition of "Efficient Markets"p. 354
Bibliographyp. 356
Indexp. 376
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780122796715
ISBN-10: 0122796713
Audience: Professional
Format: Hardcover
Language: English
Number Of Pages: 383
Published: 14th May 2001
Country of Publication: US
Dimensions (cm): 23.57 x 15.7  x 2.36
Weight (kg): 0.66