SFB649DP2014 035
Adaptive Order Flow Forecasting with Multiplicative Error Models
Wolfgang K. Härdle
Andrija Mihoci
Christopher Hian-Ann Ting
Abstract:
A flexible statistical approach for the analysis of time-varying dynamics of transaction
data on financial markets is here applied to intra-day trading strategies. A local adaptive
technique is used to successfully predict financial time series, i.e., the buyer and the
seller-initiated trading volumes and the order flow dynamics. Analysing order flow series
and its information content of mini Nikkei 225 index futures traded at the Osaka Securities
Exchange in 2012 and 2013, a data-driven optimal length of local windows up to approximately
1-2 hours is reasonable to capture parameter variations and is suitable for short-term
prediction. Our proposed trading strategies achieve statistical arbitrage opportunities and
are therefore beneficial for quantitative finance practice.
Keywords:
multiplicative error models, trading volume, order flow, forecasting
JEL Classification:
C41, C51, C53, G12, G17