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 The Validity of Models on the Information Content of Trades

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  • Â Leif Brandes

    (Institute for Strategy and Business Economics, University of Zurich)

  • Â Egon Franck

    (Institute for Strategy and Business Economics, University of Zurich)

  • Â Erwin Verbeek

    (Institute for Strategy and Business Economics, University of Zurich)

Abstract

 Measuring the (private) information content of stock trades is an important topic in market microstructure research. A common problem of stock markets is that it is ex-ante not possible to separate phases where the scope for asymmetric information is likely to be broader from those, where there is less exposure to traders with superior information. Such a distinction is needed to directly test the reliability of the proposed measures. This paper applies a unique data set from the betting market to provide such a direct test. We exploit the fact that betting occurs preplay, i.e. before match start, as well as inplay. We test the hypothesis that measures of private information will be less pronounced for inplay betting quotations (where all actions on the court are publicly observable, and trading on private information is unlikely) than for preplay betting quotations. Based on more than 23,000 transactions for the 2008 Wimbledon final, and five additional matches, we present first empirical support for this relation.

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Bibliographic Info

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 00120.

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Length: 33
Date of creation:
Date of revision: 2010
Handle: RePEc:iso:wpaper:0120

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Keywords: betting; market microstructure; asymmetric information; vector autoregressive model;

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References

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  1. 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.
  2. Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
  3. 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.
  4. Karen Croxson & J. James Reade, 2011. "Information and Efficiency: Goal Arrival in Soccer Betting," Discussion Papers 11-01, Department of Economics, University of Birmingham.
  5. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-36, September.
  6. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  7. Leach, J Chris & Madhavan, Ananth N, 1993. "Price Experimentation and Security Market Structure," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 375-404.
  8. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(2), pages 171-207, Spring.
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  10. Huang, Roger D & Stoll, Hans R, 1997. "The Components of the Bid-Ask Spread: A General Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 995-1034.
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  12. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
  13. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, 08.
  14. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  15. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
  16. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-35.
  17. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  18. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-95.
  19. Chiang, Raymond & Venkatesh, P C, 1988. " Insider Holdings and Perceptions of Information Asymmetry: A Note," Journal of Finance, American Finance Association, vol. 43(4), pages 1041-48, September.
  20. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
  21. Stoll, Hans R, 1989. " Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 115-34, March.
  22. Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
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