Modeling the interdependence of volatility and inter-transaction duration processes

Abstract

This paper develops an approach for modeling the interdependence of intra-day volatility and trade duration processes, and extends the recursive specifications that have recently been proposed in the literature. We propose a suitable GMM estimation strategy that includes straightforward estimation of the autoregressive conditional duration model. A Monte Carlo study examines the performance of the estimation method. The empirical work investigates the impact of volatility on transaction intensity in the secondary equity market after a large initial public offering. We find that lagged volatility significantly reduces transaction intensity, which is consistent with predictions from microstructure theory.