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Utilising Time Series Methods to Assess Information and Inventory Effects in a Dealer Market in Illiquid Stocks

Listed author(s):
  • Andy Snell
  • Ian Tonks

    ()

The purpose of this paper is to quantify and test for the existence of inventory control and asymmetric information in stock market price quotes, extending the time series work of Hasbrouck (1988,1991) to the institutional setting of the London Stock Exchange. In contrast to the NYSE work our model and institutional framework enables us to deduce exact restrictions on the effects of public and liquidity-plus-private information shocks, within a simple bivariate VAR for price quotes and inventories. We show that the existence of asymmetric information or inventory control rests on the signficance of precise functions of parameters in a single estimating system. We test the model on trade-by-trade observations for fifteen illiquid stocks on the LSE. Our findings are that both asymmetric information and inventory control area robust feature of our sample of illiquid stocks. This result accords with previous findings concerning NYSE stocks, particularly with regard to the speed of adjustment of inventories, the existence of a shift in their desired levels and the pervasive influence of trades on the long run level of prices through their role in revealing information on the stocks fundamental value.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp242.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp242.

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Date of creation: Mar 1996
Handle: RePEc:fmg:fmgdps:dp242
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
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  3. A. Abhyankar & D. Ghosh & E. Levin & R.J. Limmack, 1997. "Bid-ask Spreads, Trading Volume and Volatility: Intra-day Evidence from the London Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(3), pages 343-362.
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  9. de Jong, Frank & Nijman, Theo & Roell, Ailsa, 1996. "Price effects of trading and components of the bid-ask spread on the Paris Bourse," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 193-213, June.
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  12. Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, vol. 37(3), pages 371-398, March.
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  17. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  18. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-656.
  19. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
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  22. Choi, J. Y. & Salandro, Dan & Shastri, Kuldeep, 1988. "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 219-230, June.
  23. Admati, Anat R & Pfleiderer, Paul, 1989. "Divide and Conquer: A Theory of Intraday and Day-of-the-Week Mean Effects," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 189-223.
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