Modeling microstructure noise using Hawkes processes

Hawkes processes are used for modeling tick-by-tick variations of a single or of a pair of asset prices. For each asset, two counting processes (with stochastic intensities) are associated respectively with the positive and negative jumps of the price. We show that, by coupling these two intensities, one can reproduce high-frequency mean reversion structure that is characteristic of the microstructure noise. Moreover, in the case of two assets, by coupling the stochastic intensities corresponding to the positive (resp. negative) jumps of each asset, we are able to reproduce the Epps effect, i.e., the decorrelation of the increments at microscopic scales. At large scale our model becomes diffusive and converge towards a standard Brownian motion. Analytical closed-form formulae for the mean signature plot, the diffusive correlation matrix and the cross-asset correlation function at any time-scale are given. Empirical results are shown on futures Euro-Bund and Euro-Bobl high frequency da...

• Type: Journal
• Year: 2011
• Where: ICASSP
• Authors: Emmanuel Bacry, Sylvain Delattre, Marc Hoffmann, Jean-Francois Muzy
• Keywords: Asset, Diffusive Correlation Matrix, ICASSP 2011, Signal Processing, Stochastic Intensities