Bid-Ask Spreads and Volume:The Role of Trade Timing
AbstractI formulate a stylized Glosten-Milgrom model of financial market trading in which people are allowed to time their trading decision. The focus of the analysis is to understand people’s timing behavior and how it affects bid- and offer-prices and volume. Assuming heterogeneous quality of information, not all informed traders choose to trade immediately but some chose to delay, although they expect public expectations to move against them. Compared to a myopic, no-timing setting, first movers with timing have better quality information. Contrary to casual intuition this behavior lowers bid-ask spreads early on and increases them in later periods. Price-variability and total volume in both periods combined decrease. A numerical analysis shows that with timing the spreads are very stable (though decreasing), and that volume is increasing over time. Moreover, with timing the probability of informed trading (PIN) increases between periods.
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Length: 42 pages
Date of creation: 30 Jan 2008
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Microstructure; Sequential Trade; Trade timing.;
Find related papers by JEL classification:
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CTA-2008-02-09 (Contract Theory & Applications)
- NEP-MST-2008-02-09 (Market Microstructure)
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