A simple linear alternative to multiplicative error models with an application to trading volume

Forecasting intraday trading volume is an important problem in economics and finance. One influential approach to achieving this objective is the non-linear Component Multiplicative Error Model (CMEM) that captures time series dependence and intraday periodicity in volume. While the model is well suited to dealing with a non-negative time series, it is relatively cumbersome to implement. This paper proposes a system of linear equations, that is estimated using ordinary least squares, and provides at least as good a forecasting performance as that of the CMEM. This linear specification can easily be applied to model any time series that exhibits diurnal behaviour.