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The asymmetry of the price impact of block trades and the bid-ask spread: Evidence from the London Stock Exchange

  • Andros Gregoriou

Purpose – This paper aims to examine the price impact of block trades for FTSE 100 firms. Design/methodology/approach – Using event studies a sample of 1.6 million block purchases and 1.2 million block sales over the time period 1998-2005 is analysed. Findings – Once block price effects are estimated using quote returns to eliminate bid-ask bias, the asymmetry in buyer and seller initiated trades is eliminated. Research limitations/implications – A possible avenue for future research may be to look at the impact of inflation on the asymmetry between block purchases and sales. This may be an interesting extension to the current study given that inflation appears to be an important determinant of the equity premium in international stock markets. Practical implications – The empirical results suggest that market liquidity is one of the factors that is driving the asymmetry between block purchases and sales on the London Stock Exchange. The paper is of interest to academics and practitioners who study and invest in block trades. Originality/value – This is the first study of the UK stock market to encapsulate bid-ask biases in block trades.

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Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 35 (2008)
Issue (Month): 2 (May)
Pages: 191-199

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Handle: RePEc:eme:jespps:v:35:y:2008:i:2:p:191-199
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  1. Heflin, Frank & Shaw, Kenneth W., 2000. "Blockholder Ownership and Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 621-633, December.
  2. 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.
  3. 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.
  4. Engle, Robert F. & Patton, Andrew J., 2004. "Impacts of trades in an error-correction model of quote prices," Journal of Financial Markets, Elsevier, vol. 7(1), pages 1-25, January.
  5. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
  6. Lease, Ronald C & Masulis, Ronald W & Page, John R, 1991. " An Investigation of Market Microstructure Impacts on Event Study Returns," Journal of Finance, American Finance Association, vol. 46(4), pages 1523-36, September.
  7. Harris, Lawrence, 1989. "A Day-End Transaction Price Anomaly," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(01), pages 29-45, March.
  8. Gemmill, Gordon, 1996. " Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange under Different Publication Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1765-90, December.
  9. Jennifer S. Conrad, 2001. "Institutional Trading and Soft Dollars," Journal of Finance, American Finance Association, vol. 56(1), pages 397-416, 02.
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