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The friction-free weighted price contribution

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  • Abad, David
  • Pascual, Roberto

Abstract

We introduce a methodology to obtain friction-free estimates of Barclay and Warner’s (1993) Weighted Price Contribution (WPC). With this new approach, we verify recent simulation results suggesting that trading frictions may severely bias the WPC approach. We use high frequency data from a European electronic order-driven market to show that frictions generate a sizable downward bias in the WPC of non-aggressive small-size trades. The bias increases in periods of significant price discovery, and is due to both bid-ask bounce and serial correlation in the quote-midpoint changes. We show that our results extend to the US case.

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  • Abad, David & Pascual, Roberto, 2015. "The friction-free weighted price contribution," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 226-239.
    • Handle: RePEc:eee:reveco:v:37:y:2015:i:c:p:226-239
    DOI: 10.1016/j.iref.2014.11.025
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    More about this item

    Keywords

    Weighted price contribution; Trading frictions; Stealth trading; Aggressiveness; Market microstructure;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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