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Trades and Quotes: A Bivariate Point Process

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  • Robert F. Engle
  • Asger Lunde

Abstract

This article formulates a bivariate point process to jointly analyze trade and quote arrivals. In microstructure models, trades may reveal private information that is then incorporated into new price quotes. This article examines the speed of this information flow and the circumstances that govern it. A joint likelihood function for trade and quote arrivals is specified in a way that recognizes that an intervening trade sometimes censors the time between a trade and the subsequent quote. Models of trades and quotes are estimated for eight stocks using Trade and Quote database (TAQ) data. The essential finding for the arrival of price quotes is that information flow variables, such as high trade arrival rates, large volume per trade, and wide bid--ask spreads, all predict more rapid price revisions. This means prices respond more quickly to trades when information is flowing so that the price impacts of trades and ultimately the volatility of prices are high in such circumstances. , .

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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 1 (2003)
Issue (Month): 2 ()
Pages: 159-188

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Handle: RePEc:oup:jfinec:v:1:y:2003:i:2:p:159-188

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  1. Alfonso Dufour & Robert F. Engle, 2000. "Time and the Price Impact of a Trade," Journal of Finance, American Finance Association, vol. 55(6), pages 2467-2498, December.
  2. Robert F. Engle, 1996. "The Econometrics of Ultra-High Frequency Data," NBER Working Papers 5816, National Bureau of Economic Research, Inc.
  3. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
  4. Robert F. Engle & Joe Lange, 1997. "Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market," NBER Working Papers 6129, National Bureau of Economic Research, Inc.
  5. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  7. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
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