[youtube https://www.youtube.com/watch?v=LvfEgQ6pPdE?rel=0]

The paper titled, “Intraday periodicity and volatility persistence in financial markets”, by Andersen and Bollerslev is a 44 page analysis on volatility modeling and has close to 75 references. This paper is one of the widely quoted papers on intraday volatility modeling. In this post, I will give a brief summary of the main sections of the paper. Introduction Return volatility varies systematically over the trading day and this pattern is highly correlated with the intraday variation of trading volume and bid-ask patterns.

The paper titled, “Empirical properties of asset returns: stylized facts and statistical issues”, by Rama Cont presents 11 stylized facts applicable to wide set of assets that should be always in a quant’s working memory. These stylized facts should shape one’s thinking in building financial models. Stylized facts are the statistical properties of asset prices that are common across a wide range of instruments, markets and time periods. They are usually formulated in terms of qualitative properties of asset returns and may not be precise enough to distinguish among different parametric models.

Joel Hasbrouck in his paper, “Security Bid/Ask Dynamics with Discreteness and Clustering” , uses Gibbs sampling for estimating the parameters of a stylized market microstructure model. For any model, there are many ways to estimate parameters. One of the common methods is the likelihood approach. Even though this approach makes sense intuitively, the computational complexity explodes as the number of parameters increase. The curse of dimensionality kicks in and hence parameters become notoriously unstable.