Time and the price impact of a trade: a structural approach

We revisit the role of time in measuring the price impact of trades using a new empirical method that combines spread decomposition and dynamic duration modeling. Previous studies which have addressed the issue in a vect
We revisit the role of time in measuring the price impact of trades using a new empirical method that combines spread decomposition and dynamic duration modeling. Previous studies which have addressed the issue in a vector-autoregressive framework conclude that times when markets are most active are times when there is an increased presence of informed trading. Our empirical analysis based on recent European and U.S. data offers challenging new evidence. We find that as trade intensity increases, the informativeness of trades tends to decrease. This result is consistent with the predictions of Admati and Pfleiderer’s (1988) rational expectations model, and also with models of dynamic trading like those proposed by Parlour (1998) and Foucault (1999). Our results cast doubt on the common wisdom that fast markets bear particularly high adverse selection risks for uninformed market participants. JEL Classification: G10, C32 Keywords: Price Impact of Trades, Trading Intensity, Dynamic Duration Models, Spread Decomposition Models, Adverse Selection Risk
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Metadaten
Author:Joachim G. Grammig, Erik Theissen, Oliver Wünsche
URN:urn:nbn:de:hebis:30-92963
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2011,08
Series (Serial Number):CFS working paper series (2011, 08)
Document Type:Working Paper
Language:English
Year of Completion:2011
Year of first Publication:2011
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2011/03/08
Tag:Adverse Selection Risk; Dynamic Duration Models; Price Impact of Trades; Spread Decomposition Models; Trading Intensity
Issue:Version Febuary 9, 2011
Pagenumber:37
HeBIS PPN:234643803
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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