Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks
AbstractThis paper develops a structural model of intraday price formation that embodies both public information shocks and microstructure effects. Due to its structural nature, the modelâs underlying parameters provide summary measures to asset trading costs, the sources of short-run price volatility, and the speed of price discovery in an internally consistent, unified setting. We estimate the model using transaction level data for a cross-section of NYSE stocks. We find, for example, that the parameter estimates jointly explain the observed U-shaped pattern in quoted bid-ask spreads and in price volatility, the magnitude of transaction price volatility due to market frictions, and the autocorrelation patterns of transaction returns and quote revisions. Further, in contrast to bid-ask spread patterns, we find that execution costs of a trade are much smaller than the spread and increase monotonically over the course of the day. This may provide an explanation for why there is concentration in trade at the open.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 96-34.
Date of creation: Nov 1996
Date of revision:
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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
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Other versions of this item:
- Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-64.
- Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
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