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A hidden Markov model approach to information-based trading: theory and applications

journal contribution
posted on 2015-11-01, 00:00 authored by Xiangkang YinXiangkang Yin, J Zhao
This paper develops a novel approach to information-based securities trading by characterizing the hidden state of the market, which varies following a Markov process. Extensive simulation demonstrates that the approach can successfully identify market states and generate dynamic measures of information-based trading that outperform prevailing models. A sample of 120 NYSE stocks further verifies that it can better depict trading dynamics. With this sample, we characterize the features of information asymmetry and belief dispersion around earnings announcements. The sample is also applied to the study of the co-movements of trading activities due to private information or disputable public information.

History

Journal

Journal of applied econometrics

Volume

30

Issue

7

Season

Nov/Dec

Pagination

1210 - 1234

Publisher

John Wiley & Sons

Location

Chichester, Eng.

ISSN

0883-7252

eISSN

1099-1255

Language

eng

Publication classification

C Journal article; C1.1 Refereed article in a scholarly journal

Copyright notice

2015, John Wiley & Sons, Ltd.