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Quadratic Hawkes processes for financial prices. (English) Zbl 1402.91905
Summary: We introduce and establish the main properties of QHawkes (‘Quadratic’ Hawkes) models. QHawkes models generalize the Hawkes price models introduced in [E. Bacry and J.-F. Muzy, Quant. Finance 14, No. 7, 1147–1166 (2014; Zbl 1402.91750)], by allowing feedback effects in the jump intensity that are linear and quadratic in past returns. Our model exhibits two main properties that we believe are crucial in the modelling and the understanding of the volatility process: first, the model is time-reversal asymmetric, similar to financial markets whose time evolution has a preferred direction. Second, it generates a multiplicative, fat-tailed volatility process, that we characterize in detail in the case of exponentially decaying kernels, and which is linked to Pearson diffusions in the continuous limit. Several other interesting properties of QHawkes processes are discussed, in particular the fact that they can generate long memory without necessarily being at the critical point. A non-parametric fit of the QHawkes model on NYSE stock data shows that the off-diagonal component of the quadratic kernel indeed has a structure that standard Hawkes models fail to reproduce. We provide numerical simulations of our calibrated QHawkes model which is indeed seen to reproduce, with only a small amount of quadratic non-linearity, the correct magnitude of fat-tails and time reversal asymmetry seen in empirical time series.

MSC:
91G70 Statistical methods; risk measures
62M10 Time series, auto-correlation, regression, etc. in statistics (GARCH)
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