An Intraday GARCH Model for Discrete Price Changes and Irregularly Spaced Observations

Abstract: We develop a novel observation-driven model for high-frequency prices. We account for irregularly spaced observations, simultaneous transactions, discreteness of prices, and market microstructure noise. The relation between trade durations and price volatility, as well as intraday patterns of trade durations and price volatility, is captured using smoothing splines. The dynamic model is based on the zero-inflated Skellam distribution with time-varying volatility in a score-driven framework. Market microstructure noise is filtered by including a moving average component. The model is estimated by the maximum likelihood method. In an empirical study of the IBM stock, we demonstrate that the model provides a good fit to the data. Besides modeling intraday volatility, it can also be used to measure daily realized volatility.