A Trade-by-Trade Surprise Measure and Its Relation to Observed Spreadson the NYSE
AbstractWe analyze the relationship between spreads and an indicator for information based transactions on trade-by-trade data. Classifying trades on the NYSE in six categories with respect to their volume relative to the quoted depth, we employ an ordered probit model to predict the category of a trade given the current market conditions. This approach allows us to test certain market microstructure hypothesis on the determinants of the buy-sell pressure. The difference between the predicted and the actual trade category (the surprise) is found to have explanatory power for the observed spreads beyond raw volume, volume relative to the quoted depth, and previous trading volume. The positive effect of the previous surprise on the observed spreads confirms the hypothesis that market-makers react to the increased probability of having traded with an informed trader by widening the spread.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 06-03.
Length: 22 pages
Date of creation: 14 Mar 2006
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-DCM-2007-04-21 (Discrete Choice Models)
- NEP-MST-2007-04-21 (Market Microstructure)
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.:
- Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992.
"An ordered probit analysis of transaction stock prices,"
Journal of Financial Economics,
Elsevier, vol. 31(3), pages 319-379, June.
- Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, Archie Craig, 1955-, 1990. "An ordered probit analysis of transaction stock prices," Working papers 3234-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Hausman, J.A. & Lo, A.W. & MacKinlay, A.C., 1991. "An Ordered Probit Analysis of Transaction Stock Prices," Weiss Center Working Papers 26-91, Wharton School - Weiss Center for International Financial Research.
- Jerry A. Hausman & Andrew W. Lo & A. Craig MacKinlay, 1991. "An Ordered Probit Analysis of Transaction Stock Prices," NBER Working Papers 3888, National Bureau of Economic Research, Inc.
- Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-74.
- Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-36, September.
- Kavajecz, Kenneth A & Odders-White, Elizabeth R, 2001. "An Examination of Changes in Specialists' Posted Price Schedules," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 681-704.
- Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
- 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.
- Alessandro Beber & Cecilia Caglio, 2005. "Order Submission Strategies and Information: Empirical Evidence from the NYSE," FAME Research Paper Series rp146, International Center for Financial Asset Management and Engineering.
- Sunil Sharma & Sushil Bikhchandani, 2000. "herd Behavior in Financial Markets - A Review," IMF Working Papers 00/48, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ingmar Nolte) The email address of this maintainer does not seem to be valid anymore. Please ask Ingmar Nolte to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.