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A piecewise linear model for trade sign inference

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  • Adam Blazejewski

    (University of Sydney, Syndey, Australia)

  • Richard Coggins

    (University of Sydney, Sydney, Australia)

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    Abstract

    We use transaction level data for twelve stocks with large market capitalization on the Australian Stock Exchange to develop an empirical model for trade sign (trade initiator) inference. The new model is a piecewise linear parameterization of the model proposed recently in Ref. [1]. The space of the predictor variables is partitioned into six regions. Signs of individual trades within the regions are inferred according to simple and interpretable rules. Across the 12 stocks the new model achieves an average out-of-sample classification accuracy of 74.38% (SD=4.25%), which is 2.98% above the corresponding accuracy reported in Ref. [1]. Two of the model's regions, together accounting for 16.79% of the total number of daily trades, have each an average classification accuracy exceeding 91.50%. The results indicate a strong dependence between the predictor variables and the trade sign, and provide evidence for an endogenous component in the order flow. An interpretation of the trade sign classification accuracy within the model's regions offers new insights into a relationship between two regularities observed in the markets with a limit order book, competition for order execution and transaction cost minimization.

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    File URL: http://128.118.178.162/eps/fin/papers/0412/0412012.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 0412012.

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    Length: 17 pages
    Date of creation: 06 Dec 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:0412012

    Note: Type of Document - pdf; pages: 17
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    Web page: http://128.118.178.162

    Related research

    Keywords: Order submission; Trade classification; Piecewise linear; Competition for order execution; Transaction cost minimization;

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    References

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    1. Hedvall, Kaj & Niemeyer, Jonas & Rosenqvist, Gunnar, 1997. "Do Buyers and Sellers Behave Similarly in a Limit Order Book? A High-Frequency Data Examination of the Finnish Stock Exchange," Working Paper Series in Economics and Finance 160, Stockholm School of Economics.
    2. Potters, Marc & Bouchaud, Jean-Philippe, 2003. "More statistical properties of order books and price impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 133-140.
    3. Adam Blazejewski & Richard Coggins, 2004. "A local non-parametric model for trade sign inference," Finance 0408009, EconWPA.
    4. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2003. "What really causes large price changes?," Papers cond-mat/0312703, arXiv.org, revised Apr 2004.
    5. Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2003. "Fluctuations and response in financial markets: the subtle nature of `random' price changes," Papers cond-mat/0307332, arXiv.org, revised Aug 2003.
    6. Fabrizio Lillo & J. Doyne Farmer, 2003. "The long memory of the efficient market," Papers cond-mat/0311053, arXiv.org, revised Jul 2004.
    7. Aitken, Michael & Frino, Alex, 1996. "The accuracy of the tick test: Evidence from the Australian stock exchange," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1715-1729, December.
    8. Hans Degryse & Frank Jong & Maarten Ravenswaaij & Gunther Wuyts, 2005. "Aggressive Orders and the Resiliency of a Limit Order Market," Review of Finance, Springer, vol. 9(2), pages 201-242, 06.
    9. Ellis, Katrina & Michaely, Roni & O'Hara, Maureen, 2000. "The Accuracy of Trade Classification Rules: Evidence from Nasdaq," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 529-551, December.
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    11. Michael Aitken & Amaryllis Kua & Philip Brown & Terry Watter & H. Y. Izan, 1995. "An Intraday Analysis of the Probability of Trading on the ASX at the Asking Price," Australian Journal of Management, Australian School of Business, vol. 20(2), pages 115-154, December.
    12. Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2004. "Fluctuations and response in financial markets: the subtle nature of 'random' price changes," Quantitative Finance, Taylor & Francis Journals, vol. 4(2), pages 176-190.
    13. Hamao, Yasushi & Hasbrouck, Joel, 1995. "Securities Trading in the Absence of Dealers: Trades and Quotes on the Tokyo Stock Exchange," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 849-78.
    14. 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.
    15. Griffiths, Mark D. & Smith, Brian F. & Turnbull, D. Alasdair S. & White, Robert W., 2000. "The costs and determinants of order aggressiveness," Journal of Financial Economics, Elsevier, vol. 56(1), pages 65-88, April.
    16. Aitken, Michael J. & Berkman, Henk & Mak, Derek, 2001. "The use of undisclosed limit orders on the Australian Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1589-1603, August.
    17. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-89, December.
    18. Marc Potters & Jean-Philippe Bouchaud, 2002. "More statistical properties of order books and price impact," Science & Finance (CFM) working paper archive 0210710, Science & Finance, Capital Fund Management.
    19. Verhoeven, Peter & Ching, Simon & Guan Ng, Hock, 2004. "Determinants of the decision to submit market or limit orders on the ASX," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 1-18, January.
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