Clustering and Mean Reversion in a Hawkes Microstructure Model

Authors

  • José Da Fonseca,

    Corresponding author
    1. José Da Fonseca is Senior Lecturer at the Department of Finance, Auckland University of Technology, Auckland, New Zealand
    • Correspondence author, Department of Finance, Auckland University of Technology, Business School, Private Bag 92006, 1142 Auckland, New Zealand. Tel: ++64-9-9219999 extn 5063, fax: ++64-9-9219940, e-mail: jose.dafonseca@aut.ac.nz

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  • Riadh Zaatour

    1. Riadh Zaatour is at the Chair of Quantitative Finance, Ecole Centrale Paris, Châtenay-Malabry, France
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Abstract

This paper provides explicit formulas for the first and second moments and the autocorrelation function of the number of jumps over a given interval for the multivariate Hawkes process. These computations are possible thanks to the affine property of this process. We unify the stock price models of Bacry et al. (2013a, Quantitative Finance, 13, 65–77) and Da Fonseca and Zaatour (2014, Journal of Futures Markets) both of them based on the Hawkes process, the first one having a mean reverting behavior while the second one a clustering behavior, and build a model having these two properties. We compute various statistics as well as the diffusive limit for the stock price that determines the connection between the parameters driving the high-frequency activity to the daily volatility. Lastly, the impulse function giving the impact on the stock price of a buy/sell trade is explicitly computed. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:813–838, 2015

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