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Modeling Trade Direction

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  • Rosenthal, Dale W.R.

Abstract

The problem of classifying trades as buys or sells is examined. I propose estimated quotes for midpoint and bid/ask tests and a modeling approach to classification. Prevailing quotes are estimated using flexible approximations to the distribution for delays of quotes relative to trade timestamps. Classification is done by a generalized linear model which includes improved versions of midpoint, tick, and bid/ask tests. The model also considers the relative strengths of these tests, can account for market microstructure peculiarities, and allows for autocorrelations and cross-correlations in trade direction. The correlation modeling corrects for pseudoreplication, yielding more accurate standard errors and fixed effect estimates. Further, the model estimates probabilities of correct classification. The model is compared to various trade classification methods using a sample of 2,836 domestic US stocks from an unexplored, recent, and readily-available dataset. Out of sample, modeled classifications are 1-2% more accurate overall than current methods; this improvement is consistent across dates, sectors, and locations relative to the inside quote. For Nasdaq and NYSE stocks, 1% and 1.3% of the improvement comes from using relative strengths of the various tests; 0.9% and 0.7% of the improvement, respectively, comes from using some form of estimated quotes. For AMEX stocks, a 0.4% improvement is attributed to using a lagged version of the bid/ask test. I also find indications of short- and ultra-short-term alpha.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10209.

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Date of creation: Aug 2008
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Handle: RePEc:pra:mprapa:10209

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Keywords: market microstructure; trade classification; generalized linear mixed model; ultra-high-frequency data analysis;

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References

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  1. Kauermann G. & Carroll R.J., 2001. "A Note on the Efficiency of Sandwich Covariance Matrix Estimation," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 96, pages 1387-1396, December.
  2. Steven Caudill & Beverly Marshall & Jacqueline Garner, 2004. "Improved trade classification rules: Estimates using a logit model based on misclassified data," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 32(3), pages 256-256, September.
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  13. Olivier Vergote, 2005. "How to Match Trades and Quotes for Nyse Stocks?," Center for Economic Studies - Discussion papers, Katholieke Universiteit Leuven, Centrum voor Economische Studiën ces0510, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  14. George C. Chacko & Jakub W. Jurek & Erik Stafford, 2008. "The Price of Immediacy," Journal of Finance, American Finance Association, American Finance Association, vol. 63(3), pages 1253-1290, 06.
  15. Hans R. Stoll, 2006. "Electronic Trading in Stock Markets," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(1), pages 153-174, Winter.
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Cited by:
  1. Perlin, Marcelo & Brooks, Chris & Dufour, Alfonso, 2014. "On the performance of the tick test," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(1), pages 42-50.

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