Transaction Costs and the Asymmetric Price Impact of Block Trades
AbstractThe article examines the impact of transaction costs on the trading strategy of informed institutional investors in a sequential trading market where traders can choose to transact a large or a small amount of stock. The analysis shows how the trading strategy of informed investors and the price impact of their trades depends on market conditions. The main prediction of the model is that institutional buyers are, on average, more aggressive than institutional sellers in bearish markets and less aggressive in bullish markets. Hence, the price impact is higher for purchases when market conditions are bearish, while it is higher for sales when market conditions are bullish. However, this asymmetry vanishes during strongly bearish or bullish phases, when information-based orders stop because the informational advantage of institutional investors becomes too small with respect to the transaction costs
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 252.
Date of creation: 01 Jun 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-11 (All new papers)
- NEP-CTA-2010-06-11 (Contract Theory & Applications)
- NEP-MST-2010-06-11 (Market Microstructure)
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