Abstract: We propose a new joint model of intraday returns and durations to study the dynamics of several Chinese stocks. We include IBM from the U.S. market for comparison purposes. Flexible innovation distributions are used for durations and returns,
and the total variance of returns is decomposed into
different volatility components associated with different transaction
horizons. Our new model strongly dominates existing specifications
in the literature. The conditional hazard functions are non-monotonic and there is strong evidence for different volatility components. Although diurnal patterns, volatility components,
and market microstructure implications are similar across the
markets, there are interesting differences. Durations for
lightly traded Chinese stocks tend to carry more information than
heavily traded stocks. Chinese investors usually have longer
investment horizons, which may be explained by the specific trading
rules in China.
Keywords: market microstructure, transaction horizon, high-frequency data, ACD, GARCH
JEL Classification: C22; C11; G10; G17