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An Ordered Probit Analysis of Transaction Stock Prices

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Author Info
Jerry A. Hausman
Andrew W. Lo
A. Craig MacKinlay

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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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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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Handle: RePEc:nbr:nberwo:3888

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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. Levine, David, 1983. "A remark on serial correlation in maximum likelihood," Journal of Econometrics, Elsevier, vol. 23(3), pages 337-342, December. [Downloadable!] (restricted)
  2. Glosten, Lawrence R, 1987. " Components of the Bid-Ask Spread and the Statistical Properties of Transaction Prices," Journal of Finance, American Finance Association, vol. 42(5), pages 1293-1307, December. [Downloadable!] (restricted)
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  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. Poirier, Dale J & Ruud, Paul A, 1988. "Probit with Dependent Observations," Review of Economic Studies, Blackwell Publishing, vol. 55(4), pages 593-614, October. [Downloadable!] (restricted)
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  7. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. " An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-39, July. [Downloadable!] (restricted)
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  13. Gourieroux, Christian & Monfort, Alain & Renault, Eric & Trognon, Alain, 1987. "Generalised residuals," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 5-32. [Downloadable!] (restricted)
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  21. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(2), pages 175-205. [Downloadable!] (restricted)
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  22. 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. [Downloadable!] (restricted)
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  24. Ball, Clifford A, 1988. " Estimation Bias Induced by Discrete Security Prices," Journal of Finance, American Finance Association, vol. 43(4), pages 841-65, September. [Downloadable!] (restricted)
  25. 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)
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  29. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. [Downloadable!] (restricted)
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