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An Ordered Probit Analysis of Transaction Stock Prices

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  • Jerry A. Hausman
  • Andrew W. Lo
  • A. Craig MacKinlay

Abstract

We estimate the conditional distribution of trade-to-trade price changes using ordered probit, a statistical model for discrete random variables. Such an approach takes into account the fact that transaction price changes occur in discrete increments, typically eighths of a dollar, and occur at irregularly spaced time intervals. Unlike existing continuous-time/discrete-state models of discrete transaction prices, ordered probit can capture the effects of other economic variables on price changes, such as volume, past price changes, and the time between trades. Using 1988 transactions data for over 100 randomly chosen U.S. stocks, we estimate the ordered probit model via maximum likelihood and use the parameter estimates to measure several transaction-related quantities, such as the price impact of trades of a given size, the tendency towards price reversals from one transaction to the next, and the empirical significance of price discreteness.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3888.

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Date of creation: Oct 1991
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Publication status: published as Journal of Financial Economics, Volume 31, No.2, pp.319-379, 1992
Handle: RePEc:nbr:nberwo:3888

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