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Markets Change Every Day: Evidence from the Memory of Trade Direction

2011; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.1735352

1556-5068

Spyros Skouras, Christos Axioglou,

Stock Market Forecasting Methods

We present empirical evidence that there are periodic, specifically daily, structural breaks in the trade direction time series process, a fact with implications for several key intra-day characteristics of markets. We suggest that breaks arise as a consequence of daily variation in order flow direction independently of intra-day events and as a consequence of a natural and widespread daily periodicity in the timing of investment decisions. Empirical implementation of our short memory AR model with daily level shifts captures the striking long horizon predictability of trade direction, performs better out-of-sample than the standard long memory ARFIMA alternative and is computationally easier to estimate.