Heterogeneous component multiplicative error models for forecasting trading volumes

We propose a novel approach to modelling and forecasting high frequency trading volumes. The new model extends the Component Multiplicative Error Model of Brownlees et al. (2011) by introducing a more flexible specification of the long-run component. This uses an additive cascade of MIDAS polynomial filters, moving at different frequencies, in order to reproduce the changing long-run level and the persistent autocorrelation structure of high frequency trading volumes. After investigating its statistical properties, the merits of the proposed approach are illustrated by means of an application to six stocks traded on the XETRA market in the German Stock Exchange.