Time-Varying Arrival Rates of Informed and Uninformed Trades
AbstractIn this paper we extend the model of Easley and O'Hara (1992) to allow the arrival rates of informed and uninformed trades to be time-varying and forecastable. We specify a generalized autoregressive bivariate process for the arrival rates of informed and uninformed trades and estimate the model on 16 actively traded stocks on the New York Stock Exchange over 15 years of transaction data. Our results show that uninformed trades are highly persistent. Uninformed order arrivals clump together, with high uninformed volume days likely to follow high uninformed volume days, and conversely. This behavior is consistent with the passive characterization of the uninformed found in the literature. But we do find an important difference in how the uninformed behave; they avoid trading when the informed are forecasted to be present. Informed trades also exhibit complex patterns, but these patterns are not consistent with the strategic behavior posited in the literature. The informed do not appear to hide in order flow, but instead they trade persistently. We also investigate the correlation between the arrival rates of trades and trade composition on market volatility, liquidity and depth. We find that although volatility increases with the forecasted arrival rates of total trades, it is relatively independent of the forecasted composition of the trade. We use the opening bid-ask spread as a measure of market liquidity. We find that as the number of trades increases over time, the relative proportion of informed trades decreases and hence, spreads become narrower and the market becomes more liquid. Finally, we compute the price impact curve of consecutive buy orders and report the half life of the price impact as a measure of market depth. We find a positive correlation between the half life and total trades indicating that the market is deeper in presence of more trades.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0207017.
Length: 38 pages
Date of creation: 30 Aug 2002
Date of revision:
Note: Type of Document - pdf; prepared on LaTex; to print on postscript; pages: 38 ; figures: included. prepared via dvipdfm
Contact details of provider:
Web page: http://126.96.36.199
Arrival rates; informed trades; uninformed trades; autoregressive process; market depth; liquidity; volatility.;
Other versions of this item:
- David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(2), pages 171-207, Spring.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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.:
- Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, vol. 55(5), pages 2117-2155, October.
- Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
- Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-35.
- Dufour, Alfonso & Engle, Robert F, 1999.
"Time and the Price Impact of a Trade,"
University of California at San Diego, Economics Working Paper Series
qt62c0h04j, Department of Economics, UC San Diego.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Engle, Robert F. & Lange, Joe, 2001. "Predicting VNET: A model of the dynamics of market depth," Journal of Financial Markets, Elsevier, vol. 4(2), pages 113-142, April.
- Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
- Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
- Chordia, Tarun & Subrahmanyam, Avanidhar & Anshuman, V. Ravi, 2001. "Trading activity and expected stock returns," Journal of Financial Economics, Elsevier, vol. 59(1), pages 3-32, January.
- Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
- 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.
- repec:aah:aarhec:1995-5 is not listed on IDEAS
- Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.