Heterogenous market hypothesis evaluation using multipower variation volatility

ABSTRACT

High-frequency trading activities are one of the common phenomena in nowadays financial markets. Enormous amounts of high-frequency trading data are generated by huge numbers of market participants in every trading day. The availability of this information allows researchers to further examine the statistical properties of informationally efficient market hypothesis (EMH). Heterogenous market hypothesis (HMH) is one of the important extensions of EMH literature. HMH introduced nonlinear trading behaviors of heterogenous market participants instead of normality assumption under the EMH homogenous market participants. In this study, we attempt to explore more high-frequency volatility estimators in the HMH examination. These include the bipower, tripower, and quadpower variation integrated volatility estimates using Heterogenous AutoRegressive (HAR) models. The empirical findings show that these alternatives multipower variation (MPV) estimators provide better estimation and out-of-sample forecast evaluations as compared to the standard realized volatility. In other words, the usage of MPV estimators is able to better explain the HMH statistically. At last, a market risk determination is illustrated using value-at-risk approach.

KEYWORDS:

• Heterogenous autoregressive models
• Heterogenous market hypothesis
• Realized volatility
• Value-at-risk

MATHEMATICS SUBJECT CLASSIFICATION:

• Primary 91G70
• Secondary 91B84

Funding

The authors would like to thank the financial support for the MOHE under the research grant FRGS.

Notes

1 For instance, the Heterogeneous-Agent Model (Chiarella, 1992; Day and Huang, 1990) studies the heterogenous behaviors of market participants that have important impacts on the dynamic stability of asset price. Using the HAM, Kouwenberg and Zwinkels (2011) and Bolt et al. (2014) studied the real estate market price volatility from the perspective of human behavior of heterogenous investors. Other studies relate to the terminology of heterogenous markets are such as Koutmas (2012) in his ICAPM analysis involves heterogenous trading behaviors of three different groups of investors in the G-7 stock markets; Dieckmann and Gallmeyer (2013) study the heterogeneous beliefs of the debt contract that defaults at the occurrence of a disastrous shock to the borrower's economy among others.