The summary informativeness of stock trades: an econometric analysis

In a security market with asymmetrically informed participants,trades are signals of private information. In this article,new measures of trade informativeness are proposed based ona decomposition of the variance of changes in the efficientprice into trade-correlated and -uncorrelated components. Thetrade-correlated component has a natural interpretation as anabsolute measure of trade informativeness. The ratio of thiscomponent to the total variance is a relative measure (i.e.,a proportion normalized with respect to the total public information).For a sample of NYSE-listed companies, trades are found to bemore informative for small firms in both absolute and relativesenses. From an analysis of intraday patterns, it appears thattrades are in absolute terms more informative at the beginningof trading, but slightly less informative in relative terms.     

Assessing the quality of a security market: a new approach to transaction-cost measurement

I discuss a new method for measuring the deviations betweenactual transaction prices and implicit efficient prices. Theapproach decomposes security transaction prices into random-walkand stationary components. The random-walk component may beidentified with the efficient price. The stationary component,the difference between the efficient price and the actual transactionprice, is termed the pricing error. Its dispersion is a naturalmeasure of market quality. I describe practical strategies forestimating these quantities. For a sample of NYSE stocks, theaverage pricing error standard deviation estimate is roughly0.33 percent of the stock price. If the pricing error is normallydistributed and if it is always a positive cost incurred bythe transaction initiators, the corresponding average transactioncost for these traders is 0.26 percent of the stock price. Thedispersion of the pricing error is also found to be elevatedat the beginning and end of the trading session.     

Testing continuous-time models of the spot interest rate

Different continuous-time models for interest rates coexistin the literature. We test parametric models by comparing theirimplied parametric density to the same density estimated nonparametrically.We do not replace the continuous-time model by discrete approximations,even though the data are recorded at discrete intervals. Theprincipal source of rejection of existing models is the strongnon-linearity of the drift. Around its mean, where the driftis essentially zero, the spot rate behaves like a random walk.The drift then mean-reverts strongly when far away from themean. The volatility is higher when away from the mean.