1202.2447 (Fulvio Baldovin et al.)

Ensemble properties of high frequency data and intraday trading rules    [PDF]

Fulvio Baldovin, Francesco Camana, Massimiliano Caporin, Attilio L. Stella

We demonstrate that a stochastic model consistent with the scaling properties
of financial assets is able to replicate the empirical statistical properties
of the S&P 500 high frequency data within a window of three hours in each
trading day. This result extends previous findings obtained for EUR/USD
exchange rates. We apply the forecast capabilities of the model to implement an
explicit trading strategy. Trading signals are model-based and not derived from
chartist criteria. In-sample and out-of-sample tests indicate that the model
performs better than a benchmark asymmetric GARCH process, and expose the
existence of small arbitrage opportunities. We discuss how to improve
performances and why the trading strategy is potentially interesting to hedge
volatility risk for S&P index-based products.

View original: http://arxiv.org/abs/1202.2447