Stochastic Volatility Models with Transaction Time Risk

We provide a structural approach to disentangle Granger versus instantaneous causality effects from transaction durations to transaction prices. So far, in the literature, instantaneous causality effects have either been excluded or cannot be identified separately from Granger type causality effects. By giving explicit moment conditions for observed returns over (random) transaction duration intervals, we are able to identify the instantaneous causality effect where news events drive simultaneously both surprises in durations and surprises in, in particular, volatilities. We show how to implement these moment conditions and find in our empirical illustration that about half of the total variance in asset prices can be attributed to surprises in durations.