Forecasting the Frequency of Changes in Quoted Foreign Exchange Prices with the Autoregressive Conditional Duration Model

Posted: 22 Aug 1998

See all articles by Jeffrey R. Russell

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Abstract

This paper applies the Autoregressive Conditional Duration model to Foreign Exchange quotes arriving on Reuter's screens. The Autoregressive Conditional Duration model, proposed in Engle and Russell (1995), is a new statistical model for the analysis of data that do not arrive in equal time intervals. When Dollar/Deutschmark data are examined, it is clear that many of the price quotes carry little information about the price process, as they are simply repeats of the previous quote. By selectively thinning the sample, we develop a measure and forecasts for the intensity of price changes. This measure is related to standard measures of volatility but is formulated in a way that better captures the irregular sampling intervals that are inherent to high frequency financial data. Continuous-stochastic-process theorems for crossing times are used to derive an exact relationship between the intensity of price changes and standard volatility measures. The model might be useful for traders and allows tests that other variables are useful in forecasting the intensity of price changes. Generally, little support is found for price leadership, but other variables influence the intensity of price changes.

JEL Classification: G15

Suggested Citation

Russell, Jeffrey R. and Engle, Robert F., Forecasting the Frequency of Changes in Quoted Foreign Exchange Prices with the Autoregressive Conditional Duration Model. Available at SSRN: https://ssrn.com/abstract=6834

Jeffrey R. Russell (Contact Author)

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-0720 (Phone)
773-702-0458 (Fax)

Robert F. Engle

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

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