Profiling high-frequency equity price movements in directional changes

Abstract

Market prices are traditionally sampled in fixed time intervals to form time series. Directional change (DC) is an alternative approach to record price movements. Instead of sampling at fixed intervals, DC is data driven: price changes dictate when a price is recorded. DC provides us with a complementary way to extract information from data. It allows us to observe features that may not be recognized in time series. The argument is that time series and DC-based analysis complement each other. With data sampled at irregular time intervals in DC, however, some of the time series indicators cannot be used in DC-based analysis. For example, returns must be time adjusted and volatility must be amended accordingly. A major objective of this paper is to introduce indicators for profiling markets under DC. We analyse empirical high-frequency data on major equities traded on the UK stock market, and through DC profiling extract information complementary to features observed through time series profiling.

Keywords:

• Directional change
• Time series
• Profiling
• Return
• Volatility
• Events

Acknowledgements

The authors would like to thank Richard Olsen for introducing the concept of directional changes to us. We would like to thank Thomson Reuters for providing the high-frequency data, through a contract with A. Serguieva. The paper has benefited from insightful comments by the anonymous referees, to whom we are grateful.

Notes

¹ Full output reported in this paper will be accessible from http://www.bracil.net/finance/DirectionalChanges/