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The price impact of trades in illiquid stocks in periods of high and low market activity

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Author Info
Spierdijk, L.
Nijman, T.E.
Soest, A.H.O. (Tilburg University, Center for Economic Research)

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Abstract

Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and its relation to the trading intensity. While the price impact curve for frequently traded stocks monotonically increases towards the full information price, we find impulse response functions that first 'over-shoot' and subsequently decrease towards the full information price. The overshooting effect strongly depends upon the bid-ask spread and the trading intensity, which can be explained by inventory imbalances and asymmetric information of informed and uninformed traders. Furthermore, we show that the difference in price impact between periods of slow and fast trading is much larger for illiquid stocks than for frequently traded stocks. We model the overnight behavior of the trading intensity and returns and show that information contained in the trading intensity of illiquid stocks is carried over to the next day. Additionally, we show that, for infrequently traded stocks, it may take several days before the full information price that follows a trade is attained, even in periods of relatively high market activity. Moreover, the adjustment time crucially depends upon the bid-ask spread and the trading intensity.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 29.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200229

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Related research
Keywords: asymmetric information

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Find related papers by JEL classification:
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alfonso Dufour & Robert F. Engle, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series 99-15, Department of Economics, UC San Diego. [Downloadable!]
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  2. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(3), pages 571-95. [Downloadable!] (restricted)
  3. Robert F. Engle & Asger Lunde, 1998. "Trades and Quotes: A Bivariate Point Process," University of California at San Diego, Economics Working Paper Series 98-07, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  4. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March. [Downloadable!] (restricted)
  5. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  6. Spierdijk, L., 2002. "An empirical analysis of the role of the trading intensity in information dissemination on the NYSE," Discussion Paper 30, Tilburg University, Center for Economic Research. [Downloadable!]
  7. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
  8. Robert F. Engle & Andrew J. Patton, 2000. "Impacts of Trades in an Error-Correction Model of Quote Prices," University of California at San Diego, Economics Working Paper Series 2000-26, Department of Economics, UC San Diego. [Downloadable!]
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  9. Tim Bollerslev & Jeffrey Wooldridge, 1992. "Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances," Econometric Reviews, Taylor and Francis Journals, vol. 11(2), pages 143-172. [Downloadable!] (restricted)
  10. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 3-40. [Downloadable!] (restricted)
  11. Drost, F.C. & Werker, B.J.M., 2001. "Semiparametric duration models," Discussion Paper 11, Tilburg University, Center for Economic Research. [Downloadable!]
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  12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  13. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nikolaus Hautsch, 2005. "The latent factor VAR model: Testing for a common component in the intraday trading process," FRU Working Papers 2005/03, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
  2. Craig Furfine, 2003. "When is inter-transaction time informative?," Working Paper Series WP-03-04, Federal Reserve Bank of Chicago. [Downloadable!]
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