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Time and the price impact of a trade: A structural approach

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  • Grammig, Joachim G.
  • Theissen, Erik
  • Wünsche, Oliver

Abstract

We revisit the role of time in measuring the price impact of trades using a new empirical method that combines spread decomposition and dynamic duration modeling. Previous studies which have addressed the issue in a vector-autoregressive framework conclude that times when markets are most active are times when there is an increased presence of informed trading. Our empirical analysis based on recent European and U.S. data offers challenging new evidence. We find that as trade intensity increases, the informativeness of trades tends to decrease. This result is consistent with the predictions of Admati and Pfleiderer's (1988) rational expectations model, and also with models of dynamic trading like those proposed by Parlour (1998) and Foucault (1999). Our results cast doubt on the common wisdom that fast markets bear particularly high adverse selection risks for uninformed market participants. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2011/08.

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Date of creation: 2011
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Handle: RePEc:zbw:cfswop:201108

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Keywords: Price Impact of Trades; Trading Intensity; Dynamic Duration Models; Spread Decomposition Models; Adverse Selection Risk;

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References

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  1. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, Elsevier, vol. 2(2), pages 99-134, May.
  2. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 179-207, March.
  3. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 576-605, June.
  4. Spierdijk, Laura, 2004. "An empirical analysis of the role of the trading intensity in information dissemination on the NYSE," Journal of Empirical Finance, Elsevier, Elsevier, vol. 11(2), pages 163-184, March.
  5. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
  6. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 7(1), pages 53-74, January.
  7. Anthony D. Hall & Nikolaus Hautsch, 2004. "Order Aggressiveness and Order Book Dynamics," FRU Working Papers, University of Copenhagen. Department of Economics. Finance Research Unit 2005/04, University of Copenhagen. Department of Economics. Finance Research Unit.
  8. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2004. "Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 253, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Grammig, Joachim & Wellner, Marc, 2002. "Modeling the interdependence of volatility and inter-transaction duration processes," Journal of Econometrics, Elsevier, Elsevier, vol. 106(2), pages 369-400, February.
  10. 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, Society for Financial Studies, vol. 3(4), pages 593-624.
  11. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, Econometric Society, vol. 66(5), pages 1127-1162, September.
  12. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  13. Furfine, Craig, 2007. "When is inter-transaction time informative?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(3), pages 310-332, June.
  14. Dufour, Alfonso & Engle, Robert F, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt62c0h04j, Department of Economics, UC San Diego.
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