HIGH-FREQUENCY TRANSACTION DATA: A COMPARISON BETWEEN TWO ASYMMETRIC MODELS

Abstract

This paper compares two asymmetric market microstructure models, namely, the three-state asymmetric autoregressive conditional duration (AACD) model and the activity-direction-size (ADS) model. It is shown that the two models measure different aspects of the same underlying asymmetric nature of market microstructure. It is also shown that by extending the AACD model to include two size variables and adjusting for partial durations, each model’s parameter estimates can be used to estimate the other model’s parameters exactly. Thus, the two asymmetric market microstructure models are equivalent.