Recurrence interval analysis of high-frequency financial returns and its application to risk estimation

Abstract

We investigate the probability distributions of the recurrence intervals $\tau$ between consecutive 1-min returns above a positive threshold $q>0$ or below a negative threshold $q<0$ of two indices and 20 individual stocks in China's stock market. The distributions of recurrence intervals for positive and negative thresholds are symmetric, and display power-law tails tested by three goodness-of-fit measures including the Kolmogorov-Smirnov (KS) statistic, the weighted KS statistic and the Cramér-von Mises criterion. Both long-term and shot-term memory effects are observed in the recurrence intervals for positive and negative thresholds $q$. We further apply the recurrence interval analysis to the risk estimation for the Chinese stock markets based on the probability $W_q(\Delta t,t)$, Value-at-Risk (VaR) analysis and VaR analysis conditioned on preceding recurrence intervals.

17 pages, 10 figures, 1 table

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