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Objectives
Using Markov chain model to analyze intraday dynamics of volume and price data for Nifty futures during 50 days from 1/8/2013 to 20/9/2013 To test whether the U-Shaped pattern is followed by Nifty futures prices by using statistical tests Testing which model among private information model, specialist market power model, and inventory model has most explanatory power where U-shaped behavior is concerned
To understand how volatility is affected at opening time, closing time and during lunch hours
Partitioning is done as shown below in order to get equally distributed volatility states H: N: L:
Volatility and volume changes are calculated as = and where where is the volatility change over two successive days, and volume change over two successive days Volume and return variability are partitioned as follows H: N: and
L: H: N: L:
for volatility
Limiting probabilities would reflect which transition between two states will be more frequent in the long run To test this we form a hypothesis which implies that long run probabilities for all transactions between two states are same
Thus if null hypothesis cant be rejected then long run probabilities of various state to state transactions will be identical Limiting probability vector denotes long run distribution at hour h It is used to test whether long run distribution is different across different hours U- shaped pattern would mean that opening and closing hours at other hours will be different from
We combined information about volume and volatility changes to form a composite state of level of We then tested the null hypothesis that time proportions in all states are not significantly different using chi square test so as to verify the statement
Empirical Results
Let HH=1, HN=2, HL=3, NH=4, NN=5, NL=6, LH=7, LN=8,LL=9, where HH denotes a high volatility state followed by another high volatility state, and so on Using second-order Markov chain, we constructed the transition probability matrices (9 9) for each hour which are shown in tables 1.1 to 1.6 long-run limiting probability of each state (HH,HN, HL, NH, NN, NL, LH, LN, LL) in the various time intervals is obtained using In the opening hours the successive transitions happened more frequently which is consistent with U- shaped pattern of high volatilities During lunch time there is low volatility which can be attributed to low activity All but two null hypotheses were rejected which shows transition probabilities of higher volatilities to higher volatilities in the opening and closing hours are significantly higher than those of other transitions
Conclusions
The project used Markov chain methodology to examine the transition patterns of the intraday Nifty futures trading volume and price data. The data was divided in three equal frequency groups according to mean absolute deviation of volatility. We studied if there is transition pattern of successive price volatilities in different periods within the trading day and tested if the transition patterns in different hours are the same. Results show that for futures price volatilities, there is a U-shaped transition pattern as the most probable transitions in the opening and closing hours are that between higher volatilities. We also nd that before the lunch break, from 12:15 to 12:30 h, the transition patterns had lower volatilities. We tested the hypothesis that the days of higher volatility changes will also be the days of higher volume adjustments, and vice versa using daily closing price and trading volume data.
We concluded that during the sample period, the long-run time proportion of higher volatilities with higher volume is the largest and the long-run time proportion of lower volatilities with lower volume is the second largest Also these are significantly larger than that of any other volatilityvolume combinations Our results are supportive of the information model
HH HN HL NH NN NL LH LN LL
HH HN HL NH NN NL LH LN LL 0.471 0.235 0.294 0 0 0 0 0 0 0 0 0 0.487 0.231 0.282 0 0 0 0 0 0 0 0 0 0.366 0.268 0.366 0.281 0.344 0.375 0 0 0 0 0 0 0 0 0 0.222 0.481 0.296 0 0 0 0 0 0 0 0 0 0.320 0.160 0.520 0.438 0.375 0.188 0 0 0 0 0 0 0 0 0 0.292 0.417 0.292 0 0 0 0 0 0 0 0 0 0.333 0.262 0.405 Limiting State Vector (9) NH NN NL
HH
HN
HL
LH
LN
LL
Transition Matrix NH NN NL 0 0 0 0.375 0.250 0.375 0 0 0 0 0 0 0.286 0.429 0.286 0 0 0 0 0 0 0.349 0.233 0.419 0 0 0 Limiting State Vector (10) NH NN NL
HH
HN
HL
LH
LN
LL
HH
LH 0 0
LN 0
LL 0
HN 0 0 0 0.2927 0.3171 0.3902 0 0 0 HL 0 0 0 0 0 0 0.2609 0.3478 0.3913 NH 0.2927 0.5122 0.1951 0 0 0 0 0 0 NN 0 0 0 0.375 0.2813 0.3438 0 0 0 NL 0 0 0 0 0 0 0.1628 0.3488 0.4884 LH 0.25 0.375 0.375 0 0 0 0 0 0 LN 0 0 0 0.3571 0.3095 0.3333 0 0 0 LL 0 0 0 0 0 0 0.1864 0.3559 0.4576 HH HN HL Limiting State Vector (11) NH NN NL LH LN LL 0.168
Transition Matrix NH NN NL LH LN LL 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0.6667 0 0.3333 0 0 0 0 0 0 0.2857 0.5714 0.1429 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0.1429 0.5714 0.2857 0 0 0 0 0 0 0.25 0.25 0.5 Limiting State Vector (12) NH NN NL
LH
LN
LL 0.152
Transition Matrix
NH
NN
NL
LH
LN
LL
0 0 0 0 0 0 0.4286 0.2857 0.2857 0 0 0 0 0 0 0.2941 0.3235 0.3824 0 0 0 0 0 0 0.2581 0.4516 0.2903 0 0 0 0 0 0 0.3514 0.3784 0.2703 0 0 0 0 0 0 0.3056 0.3889 0.3056 0 0 0 0 0 0 0.4 0.2 0.4 Limiting State Vector (13) NH NN NL
HH
HN
HL
LH
LN
LL 0.110
Transition Matrix NH NN NL 0 0 0 0.3514 0.2432 0.4054 0 0 0 0 0 0 0.3333 0.3333 0.3333 0 0 0 0 0 0 0.3333 0.3333 0.3333 0 0 0 Limiting State Vector (14) NH NN NL
LH
LN
LL
HH
HN
HL
LH
LN
LL 0.108