Publication | Open Access
Order Flow, Transaction Clock, and Normality of Asset Returns
427
Citations
18
References
2000
Year
EngineeringPrice ProcessStochastic AnalysisFinancial MathematicsAsset PricingFinancial Time Series AnalysisStochastic ProcessesOrder FlowFinancial EconometricsJump DiffusionsEconomicsQuantitative FinanceStochastic VolatilityFinanceFlow TradingMultivariate Stochastic VolatilityFinancial EconomicsBusinessPerfect NormalityMarket Trend
The goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change. Clark (1973) addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator. We extend Clark's results and find the following: (i) stochastic time changes are mathematically much less constraining than subordinators; (ii) the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns; (iii) this clock can be modeled nonparametrically, allowing both the time‐change and price processes to take the form of jump diffusions.
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