A Generalized Gamma Autoregressive Conditional Duration Model

Abstract

I extend the ACD model of Engle and Russell (1998) to generalized gamma durations with a conditional mean that depends on the exponential of the explanatory variables. This allows for a non-monotonic hazard function taking U-shaped or inverted U-shaped forms. The extension implies that the trading intensity persistence is reduced considerably, and that the overall fit of the model is enhanced compared to the ACD model. As a further extension of the model it is shown how to include time-varying covariates in a fully parametric framework. We analyze how transaction rates are affected by the posting of price-quotes and their changes. Besides, a model of the time between price-changes is estimated. This model is, as shown by Engle and Russell (1998), closely linked to the volatility of the stock price, and hence showing why price durations are important for intra-day prediction of volatility. The transaction volume and functions of this are used as regressors in this model and are found to be important. The datasets used in the paper consist of a random sample from the fifty stocks at the NYSE with the highest capitalization value on December 13, 1996.

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