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Measuring private information in a specialist market

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  • Lamoureux, Christopher G.
  • Wang, Qin

Abstract

Since the reduced forms of the popular measures of asymmetric information in the price formation process are not nested within larger models we cannot evaluate their fit using standard statistical tools. Furthermore, pairwise correlations amongst the measures are small. We benchmark these measures cross-sectionally to realized specialist loss rates (using alternatively volume and number of trades) in the TORQ data. While five of the six measures are significantly correlated with this benchmark, this is only because they are correlated with the specialist participation rate. We infer that the measures do not measure private information in order flow, even in the setting for which they are designed.

Suggested Citation

  • Lamoureux, Christopher G. & Wang, Qin, 2015. "Measuring private information in a specialist market," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 92-119.
  • Handle: RePEc:eee:empfin:v:30:y:2015:i:c:p:92-119
    DOI: 10.1016/j.jempfin.2014.10.002
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    More about this item

    Keywords

    Specialist market; Measuring adverse selection; Realized specialist loss rate; Specialist participation rate;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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