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Asymmetries in bid and ask responses to innovations in the trading process

In: High Frequency Financial Econometrics

Author

Listed:
  • Alvaro Escribano

    (Universidad Carlos III de Madrid)

  • Roberto Pascual

    (Universidad de las Islas Baleares)

Abstract

This paper proposes a new approach to jointly model the trading process and the revisions of market quotes. This method accommodates asymmetries in the dynamics of ask and bid quotes after trade-related shocks. The empirical specification is a vector error correction (VEC) model for ask and bid quotes, with the spread as the co-integrating vector, and with an endogenous trading process. This model extends the vector autoregressive (VAR) model introduced by Hasbrouck (Hasbrouck J (1991) Measuring the information content of stock trades. J Finance 46:179–207). We provide evidence against several symmetry assumptions, very familiar among microstructure models. We report asymmetric adjustments of ask and bid prices to trade-related shocks, and asymmetric impacts of buyer and sellerinitiated trades. In general, buys are more informative than sells. The likelihood of symmetric quote responses increases with volatility. We show that our findings are robust across different model specifications, time frequencies, and trading periods. Moreover, we find similar asymmetries in markets with different microstructures.

Suggested Citation

  • Alvaro Escribano & Roberto Pascual, 2008. "Asymmetries in bid and ask responses to innovations in the trading process," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 49-82, Springer.
    • Handle: RePEc:spr:stecpp:978-3-7908-1992-2_4
    DOI: 10.1007/978-3-7908-1992-2_4
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    Cited by:

    1. Hautsch, Nikolaus & Huang, Ruihong, 2012. "The market impact of a limit order," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 501-522.
    2. Chen, Yu-Lun & Gau, Yin-Feng, 2014. "Asymmetric responses of ask and bid quotes to information in the foreign exchange market," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 194-204.
    3. Sucarrat, Genaro, 2009. "Forecast Evaluation of Explanatory Models of Financial Variability," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-33.
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    5. Roberto Pascual & David Veredas, 2010. "Does the Open Limit Order Book Matter in Explaining Informational Volatility?," Journal of Financial Econometrics, Oxford University Press, vol. 8(1), pages 57-87, Winter.
    6. Hautsch, Nikolaus & Hess, Dieter & Veredas, David, 2011. "The impact of macroeconomic news on quote adjustments, noise, and informational volatility," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2733-2746, October.
    7. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," LIDAM Discussion Papers CORE 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Daniel Havran & Kata Varadi, 2015. "Price Impact and the Recovery of the Limit Order Book: Why Should We Care About Informed Liquidity Providers?," CERS-IE WORKING PAPERS 1540, Institute of Economics, Centre for Economic and Regional Studies.
    9. Mehdi Arzandeh & Julieta Frank & Justin Daniels, 2025. "Real‐Time Tracking of Public Announcements in the Limit Order Book," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(6), pages 569-599, June.
    10. repec:hum:wpaper:sfb649dp2010-005 is not listed on IDEAS
    11. Xinyue He & Teresa Serra & Philip Garcia, 2021. "Resilience in “Flash Events” in the Corn and Lean Hog Futures Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 743-764, March.
    12. Pascual, Roberto & Pascual-Fuster, Bartolomé, 2014. "The relative contribution of ask and bid quotes to price discovery," Journal of Financial Markets, Elsevier, vol. 20(C), pages 129-150.
    13. Gianluca Marcato & Charles Ward, 2007. "Back from Beyond the Bid–Ask Spread: Estimating Liquidity in International Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 599-622, December.
    14. Mircea BAHNA & Cosmin-Octavian CEPOI & Bogdan Andrei DUMITRESCU & Virgil DAMIAN, 2018. "Estimating the Price Impact of Market Orders on the Bucharest Stock Exchange," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 120-133, December.
    15. Bart Frijns & Ivan Indriawan & Alireza Tourani‐Rad, 2021. "Quote dynamics of cross‐listed stocks," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 497-522, June.
    16. Gunther Wuyts, 2012. "The impact of aggressive orders in an order-driven market: a simulation approach," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 1015-1038, November.
    17. Pascual, Roberto & Escribano, Álvaro & Tapia, Mikel, 2000. "Adverse selection costs, trading activity and liquidity in the NYSE: an empirical analysis in a dynamic context," UC3M Working papers. Economics 7276, Universidad Carlos III de Madrid. Departamento de Economía.
    18. 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.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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