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On the performance of the tick test

Author

Listed:
  • Perlin, Marcelo
  • Brooks, Chris
  • Dufour, Alfonso

Abstract

In financial research, the sign of a trade (or identity of trade aggressor) is not always available in the transaction dataset and it can be estimated using a simple set of rules called the tick test. In this paper we investigate the accuracy of the tick test from an analytical perspective by providing a closed formula for the performance of the prediction algorithm. By analyzing the derived equation, we provide formal arguments for the use of the tick test by proving that it is bounded to perform better than chance (50/50) and that the set of rules from the tick test provides an unbiased estimator of the trade signs. On the empirical side of the research, we compare the values from the analytical formula against the empirical performance of the tick test for fifteen heavily traded stocks in the Brazilian equity market. The results show that the formula is quite realistic in assessing the accuracy of the prediction algorithm in a real data situation.

Suggested Citation

  • Perlin, Marcelo & Brooks, Chris & Dufour, Alfonso, 2014. "On the performance of the tick test," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 42-50.
    • Handle: RePEc:eee:quaeco:v:54:y:2014:i:1:p:42-50
    DOI: 10.1016/j.qref.2013.07.009
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    References listed on IDEAS

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    Cited by:

    1. Araújo, Gustavo Silva & Barbedo, Claudio Henrique da S. & Vicente, José Valentim M., 2014. "The adverse selection cost component of the spread of Brazilian stocks," Emerging Markets Review, Elsevier, vol. 21(C), pages 21-41.
    2. Jurkatis, Simon, 2020. "Inferring trade directions in fast markets," Bank of England working papers 896, Bank of England.
    3. Jurkatis, Simon, 2022. "Inferring trade directions in fast markets," Journal of Financial Markets, Elsevier, vol. 58(C).
    4. Ben Omrane, Walid & Welch, Robert, 2016. "Tick test accuracy in foreign exchange ECN markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 135-152.

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