Abstract
We propose a novel intraday instantaneous volatility measure which utilises sequences of drawdowns and drawups non-equidistantly spaced in physical time as indicators of high-frequency activity of financial markets. The sequences are re-expressed in terms of directional-change intrinsic time which ticks only when the price curve changes the direction of its trend by a given relative value. We employ the proposed measure to uncover weekly volatility seasonality patterns of three Forex and one Bitcoin exchange rates, as well as a stock market index. We demonstrate the long memory of instantaneous volatility computed in directional-change intrinsic time. The provided volatility estimation method can be adapted as a universal multiscale risk-management tool independent of the discreteness and the type of analysed high-frequency data.
Highlights
All events relevant to the performance of the financial system such as political decisions, natural disasters, or economic reports rarely happen synchronously and are typically not spaced in time
We propose a novel intraday instantaneous volatility measure which utilises sequences of drawdowns and drawups non-equidistantly spaced in physical time as indicators of high-frequency activity of financial markets
We investigate the connection between the observed number of alternating drawdowns and drawups and the instantaneous volatility
Summary
All events relevant to the performance of the financial system such as political decisions, natural disasters, or economic reports rarely happen synchronously and are typically not spaced in time. The change of days and nights, as well as seasons, is dictated by the natural structure of the physical world which is barely connected to the flow of financial activity. The global market, where the majority of transactions happen online and where traders, dealers, and market makers are distributed all around the world, is completely blind and deaf to the periodicity of days and nights, as well as to the climate factors of any standalone region of the Earth. Agnostic to the flow of the physical time, should be employed in order to handle the inner periodicity of the financial activity efficiently. We explore a concept of the endogenously defined time in finance applied to evaluate seasonality in markets’ activity
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