Empirical study of intraday option price changes using extended count regression models

In this paper we model absolute price changes of an option on the XETRA DAX index based on quote-by-quote data from the EUREX exchange. In contrast to other authors, we focus on a parameter-driven model for this purpose and use a Poisson Generalized Linear Model (GLM) with a latent AR(1) process in the mean, which accounts for autocorrelation and overdispersion in the data. Parameter estimation is carried out by Markov Chain Monte Carlo methods using the WinBUGS software. In a Bayesian context, we prove the superiority of this modelling approach compared to an ordinary Poisson-GLM and to a complex Poisson-GLM with heterogeneous variance structure (but without taking into account any autocorrelations) by using the deviance information criterion (DIC) as proposed by Spiegelhalter et al. (2002). We include a broad range of explanatory variables into our regression modelling for which we also consider interaction effects: While, according to our modelling results, the price development of the underlying, the intrinsic value of the option at the time of the trade, the number of new quotations between two price changes, the time between two price changes and the Bid- Ask spread have significant effects on the size of the price changes, this is not the case for the remaining time to maturity of the option. By giving possible interpretations of our modelling results we also provide an empirical contribution to the understanding of the microstructure of option markets.