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Discrete Dynamics in Nature and Society
Volume 2016, Article ID 1580941, 15 pages
Research Article

Modeling Financial Time Series Based on a Market Microstructure Model with Leverage Effect

Yanhui Xi,1,2,3 Hui Peng,2,3 and Yemei Qin2,3

1Hunan Province Higher Education Key Laboratory of Power System Safety Operation and Control, Changsha University of Science and Technology, Changsha, Hunan 410004, China
2School of Information Science & Engineering, Central South University, Changsha, Hunan 410083, China
3Hunan Engineering Laboratory for Advanced Control and Intelligent Automation, Changsha, Hunan 410083, China

Received 31 August 2015; Accepted 21 December 2015

Academic Editor: Filippo Cacace

Copyright © 2016 Yanhui Xi et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


The basic market microstructure model specifies that the price/return innovation and the volatility innovation are independent Gaussian white noise processes. However, the financial leverage effect has been found to be statistically significant in many financial time series. In this paper, a novel market microstructure model with leverage effects is proposed. The model specification assumed a negative correlation in the errors between the price/return innovation and the volatility innovation. With the new representations, a theoretical explanation of leverage effect is provided. Simulated data and daily stock market indices (Shanghai composite index, Shenzhen component index, and Standard and Poor’s 500 Composite index) via Bayesian Markov Chain Monte Carlo (MCMC) method are used to estimate the leverage market microstructure model. The results verify the effectiveness of the model and its estimation approach proposed in the paper and also indicate that the stock markets have strong leverage effects. Compared with the classical leverage stochastic volatility (SV) model in terms of DIC (Deviance Information Criterion), the leverage market microstructure model fits the data better.