Adverse selection costs,trading activity and price discovery in the NYSE: An empirical analysis |
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| Institution: | 1. College of Business, Lehigh University, Bethlehem, PA 18015 USA;2. Fogelman College of Business and Economics, University of Memphis, Memphis, TN 38152 USA;1. University of Alicante, Finance and Accounting, Carretera de San Vicente del Raspeig s/n, 03690 San Vicente del Raspeig, Alicante, Spain;2. University of the Balearic Islands, Business Economics, Carretera de Valldemossa km. 7.5, 07122 Palma, Mallorca, Balearic Islands, Spain |
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| Abstract: | This paper studies the role that trading activity plays in the price discovery process of a NYSE-listed stock. We measure the expected information content of each trade by estimating its permanent price impact. It depends on observable trade features and market conditions. We also estimate the time required for quotes to incorporate all the information content of a particular trade. Our results show that price discovery is faster after risky trades and also at the extreme intervals of the session. The quote adjustment to trade-related shocks is progressive and this causes risk persistency and unusual short-term market conditions. |
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