Durations on Intraday Price Series

As mentioned in a previous post, I intend to model quadratic variation in terms of multiple pairings of intensity (duration) and return level processes.   At a minimum want a pairing for “non-jump” related returns and a pairing for “jump” related returns.

To do this it is necessary to partition returns into the categories based on threshold.   We may further want to disregard price movements below a certain level unless they cumulatively add up to a return with significance within a period.   Towards this end my duration measurement function uses a threshold to determine whether a return is to be considered as an event or not.  In pseudocode:

r ← {0} ∪ diff(log(series))
t ← times (series)
durations ← {}
for (i in 2:length(r))
    # determine cumulative return since last acceptance
    cumr ← <cummulative return since last event or max cum window>

    # determine whether qualifying event has occurred
    if (|cumr| ≥ threshold or |r[i]| ≥ threshold)
        durations ← durations ∪ {t[i] - <Tlastevent>}

For the diffusion portion of the process, in this 2 second sampled data set (EUR/USD low-liquidity period), a threshold of 3e-5 (equivalent of about 1/2 pip), seems to work well:

The jump portion of the process should be set so as to capture desired jump features and not much more, here I show with a threshold of 2e-4 (equivalent to about 3 pips):


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