Copula-based dynamic conditional correlation multiplicative error processes : [Version 18 April 2013]

We introduce a copula-based dynamic model for multivariate processes of (non-negative) high-frequency trading variables revealing time-varying conditional variances and correlations. Modeling the variables’ conditional mean processes using a multiplicative error model we map the resulting residuals into a Gaussian domain using a Gaussian copula. Based on high-frequency volatility, cumulative trading volumes, trade counts and market depth of various stocks traded at the NYSE, we show that the proposed copula-based transformation is supported by the data and allows capturing (multivariate) dynamics in higher order moments. The latter are modeled using a DCC-GARCH specification. We suggest estimating the model by composite maximum likelihood which is sufficiently flexible to be applicable in high dimensions. Strong empirical evidence for time-varying conditional (co-)variances in trading processes supports the usefulness of the approach. Taking these higher-order dynamics explicitly into account significantly improves the goodness-of-fit of the multiplicative error model and allows capturing time-varying liquidity risks

Islands in the grammar? Standards of evidence

When considering how a complex system operates, the observable behavior depends upon both architectural properties of the system and the principles governing its operation. As a simple example, the behavior of computer chess programs depends upon both the processing speed and resources of the computer and the programmed rules that determine how the computer selects its next move. Despite having very similar search techniques, a computer from the 1990s might make a move that its 1970s forerunner would overlook simply because it had more raw computational power. From the naïve observer’s perspective, however, it is not superficially evident if a particular move is dispreferred or overlooked because of computational limitations or the search strategy and decision algorithm. In the case of computers, evidence for the source of any particular behavior can ultimately be found by inspecting the code and tracking the decision process of the computer. But with the human mind, such options are not yet available. The preference for certain behaviors and the dispreference for others may theoretically follow from cognitive limitations or from task-related principles that preclude certain kinds of cognitive operations, or from some combination of the two. This uncertainty gives rise to the fundamental problem of finding evidence for one explanation over the other. Such a problem arises in the analysis of syntactic island effects – the focu

Weak-form Efficient Market Hypothesis, Behavioural Finance and Episodic Transient Dependencies: The Case of the Kuala Lumpur Stock Exchange

This study utilizes the windowed-test procedure of Hinich and Patterson (1995) to examine the data generating process of KLSE CI returns series. Unlike previous studies, the present one relates the evidence to the popular weak-form EMH and behavioural finance, with the hope of offering some plausible explanations to the controversy arises between these two camps. Our econometrics results indicate that linear and non-linear dependencies play a significant role in the underlying data generating process. However, these dependencies are not stable as the results suggest that they are episodic and transient in nature. Along the line of our interpretations, we are able to offer some plausible explanations as to why weak-form EMH generally holds in KLSE, though the presence of linear and non-linear dependencies implies the potential of returns predictability. Specifically, these significant dependencies show up at random intervals for a brief period of time but then disappear again before they can be exploited by investors. Looking from a micro perspective, we are able to rationalize the co-existence of weak-form EMH and behavioural finance in KLSE when the statistical properties of random walk, linear and non-linear dependencies, which also co-exist in the time domain, are interpreted in the framework of information arrival and market reactions to that information.Data generating process; Weak-form EMH; Behavioural finance; Kuala Lumpur Stock Exchange; Malaysia.

Processing multiple non-adjacent dependencies: evidence from sequence learning

Processing non-adjacent dependencies is considered to be one of the hallmarks of human language. Assuming that sequence-learning tasks provide a useful way to tap natural-language-processing mechanisms, we cross-modally combined serial reaction time and artificial-grammar learning paradigms to investigate the processing of multiple nested (A(1)A(2)A(3)B(3)B(2)B(1)) and crossed dependencies (A(1)A(2)A(3)B(1)B(2)B(3)), containing either three or two dependencies. Both reaction times and prediction errors highlighted problems with processing the middle dependency in nested structures (A(1)A(2)A(3)B(3-)B(1)), reminiscent of the 'missing-verb effect' observed in English and French, but not with crossed structures (A(1)A(2)A(3)B(1-)B(3)). Prior linguistic experience did not play a major role: native speakers of German and Dutch-which permit nested and crossed dependencies, respectively-showed a similar pattern of results for sequences with three dependencies. As for sequences with two dependencies, reaction times and prediction errors were similar for both nested and crossed dependencies. The results suggest that constraints on the processing of multiple non-adjacent dependencies are determined by the specific ordering of the non-adjacent dependencies (i.e. nested or crossed), as well as the number of non-adjacent dependencies to be resolved (i. e. two or three). Furthermore, these constraints may not be specific to language but instead derive from limitations on structured sequence learning.Netherlands Organisation of Scientific Research (NWO) [446-08-014]; Max Planck Institute for Psycholinguistics; Donders Institute for Brain, Cognition and Behaviour; Fundacao para a Ciencia e Tecnologia (IBB/CBME, LA, FEDER/POCI) [PTDC/PSI-PCO/110734/2009]; Stockholm Brain Institute; Vetenskapsradet; Swedish Dyslexia Foundation; Hedlunds Stiftelse; Stockholm County Council (ALF, FoUU)info:eu-repo/semantics/publishedVersio

Testing Dependence Among Serially Correlated Multi-category Variables

The contingency table literature on tests for dependence among discrete multi-category variables assume that draws are independent, and there are no tests that account for serial dependencies − a problem that is particularly important in economics and finance. This paper proposes a new test of independence based on the maximum canonical correlation between pairs of discrete variables. We also propose a trace canonical correlation test using dynamically augmented reduced rank regressions or an iterated weighting method in order to account for serial dependence. Such tests are useful, for example, when testing for predictability of one sequence of discrete random variables by means of another sequence of discrete random variables as in tests of market timing skills or business cycle analysis. The proposed tests allow for an arbitrary number of categories, are robust in the presence of serial dependencies and are simple to implement using multivariate regression methods

Testing Dependence among Serially Correlated Multi-category Variables

The contingency table literature on tests for dependence among discrete multi-category variables is extensive. Existing tests assume, however, that draws are independent, and there are no tests that account for serial dependencies−a problem that is particularly important in economics and finance. This paper proposes a new test of independence based on the maximum canonical correlation between pairs of discrete variables. We also propose a trace canonical correlation test using dynamically augmented reduced rank regressions or an iterated weighting method in order to account for serial dependence. Such tests are useful, for example, when testing for predictability of one sequence of discrete random variables by means of another sequence of discrete random variables as in tests of market timing skills or business cycle analysis. The proposed tests allow for an arbitrary number of categories, are robust in the presence of serial dependencies and are simple to implement using multivariate regression methods. Monte Carlo experiments show that the proposed tests have good finite sample properties. An empirical application to survey data on forecasts of GDP growth demonstrates the importance of correcting for serial dependencies in predictability tests.contingency tables, canonical correlations, serial dependence, tests of predictability