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An Ordered Probit Analysis of Transaction Stock Prices

  • Hausman, J.A.
  • Lo, A.W.
  • MacKinlay, A.C.

We estimate the conditional distribution of trade-to-trade price changes using ordered probit, a statistical model for discrete random variables. Such an approach takes into account the fact that transaction price changes occur in discrete increments, typically eighths of a dollar, and occur at irregularly spaced time intervals. Unlike existing continuous-time/discrete-state models of discrete transaction prices, ordered probit can capture the effects of other economic variables on price changes, such as volume, past price changes, and the time between trades. Using 1988 transactions data for over 100 randomly chosen U.S. stocks, we estimate the ordered probit model via maximum likelihood and use the parameter estimates to measure several transaction-related quantities, such as the price impact of trades of a given size, the tendency towards price reversals from one transaction to the next, and the empirical significance of price discreteness.

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Paper provided by Wharton School - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 26-91.

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Length: 6341 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:pennif:26-91
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Web page: http://finance.wharton.upenn.edu/weiss/
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  1. Poirier, Dale J. & Ruud, Paul A., 1987. "Probit with Dependent Obervations," Department of Economics, Working Paper Series qt04f5m9t2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  6. Ananth Madhavan & Seymour Smidt, . "A Bayesian Model of Intraday Specialist Pricing," Rodney L. White Center for Financial Research Working Papers 02-91, Wharton School Rodney L. White Center for Financial Research.
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  12. Cho, David Chinhyung & Frees, Edward W, 1988. " Estimating the Volatility of Discrete Stock Prices," Journal of Finance, American Finance Association, vol. 43(2), pages 451-66, June.
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  23. Gourieroux, C. & Monfort, A. & Trognon, A., 1985. "A General Approach to Serial Correlation," Econometric Theory, Cambridge University Press, vol. 1(03), pages 315-340, December.
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  25. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. " An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-39, July.
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