volatility:exogenous,result of new information;endogeneity of pr

来源: marketreflections 于 2011-08-19 12:15:28 [] [博客] [旧帖] [给我悄悄话] 本文已被阅读： 次 (33769 bytes)

Self-excited models of exogenous versus endogenous shocks

in high frequency trading

Vladimir Filimonov

Chair of Entrepreneurial Risks, D-MTEC, ETH Zurich
joint work with Didier Sornette (ETH Zurich)
Abstract

This paper addresses the question of the nature of price movements - are they really purely exogenous and are news the main source of volatility in markets? This neo-classical paradigm where price changes as a result of new information about the fundamental value was first questioned in the famous paper by Shiller in 1981 that documented a much too high volatility of asset prices compared with the volatility of fundamentals proxied by that of dividends.

Starting with the paper of Cutler, Poterba and Summers (1989), this question is mostly addressed by studying the price movements and correspondent news flow in an attempt to explain the first by the second. Extending the daily data of Cutler, Poterba and Summers, and confirming their results, Bouchaud et al. and Lillo et al. have shown on high frequency data that only a small fraction of price movements could be explained by relevant news releases. This suggests that price dynamics are mostly endogenous, driven by positive feedback mechanisms in trader’s anticipation, related to the Soros’s idea of market’s reflexivity.

In this paper, we propose a novel approach to model and test for the existence and amplitude of the endogeneity of price movements. We consider the price formation as a self-excited Hawkes branching process with long memory. Each event, i.e. price change, may lead to a whole tree of offsprings, i.e. other price changes. This provides a natural set-up to describe the endogenous mechanisms at the origin of herding and order splitting leading to long-range correlation in the series of trade initiations (buy-side or sell-side). The self-excited Hawkes branching process allows us to classify different types of volatility shocks and separate the exogenous shocks from the endogenous dynamics. We present results on the identification of different market regimes, characterized in particular by the so-called branching ratio, which can be interpreted as the fraction of endogenous events within the whole population of price changes. Illustrating the model and method on the dynamics of E-mini futures contracts, we find that the market functions exhibit rich dynamical features, as revealed by that of the branching ratio. Our present study improves on the existing literature by allowing for a probabilistic rating of each price moves in terms of endogenous versus exogenous and in the statistical reconstruction of the ancestries of price dynamics, thus providing a novel level of understanding. Moreover, the reconstructed dynamics of the branching ratio offers novel insights in the development of herding and the build-up towards anomalous extreme shocks. volatility process exogenous (without quotes):►

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