Impacts of trades in an error-correction model of quote prices |
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| Institution: | 1. Department of Finance, NYU Stern School of Business and the Department of Economics, University of California, San Diego, USA;2. Department of Accounting and Finance, Financial Markets Group, London School of Economics, Houghton Street, London WC2A 2AE, UK;1. Universitat Autònoma de Barcelona, Spain;2. Centre de Recerca Matemàtica, Campus de Bellaterra, E-08193 Barcelona, Spain;1. Fachbereich Mathematik, Technische Universität Kaiserslautern, Erwin-Schrödinger Straße, 67653 Kaiserslautern, Germany;2. Fachgruppe Stochastik am Mathematischen Seminar, Christian-Albrechts-Universität zu Kiel, Ludewig-Meyn-Straße 4, 24098 Kiel, Germany;3. Department of Mathematics, SPST, University of Hamburg, Bundesstrasse 55, 20146 Hamburg, Germany;4. School of Mathematical Sciences, Dublin City University, Dublin 9, Ireland;1. New Economic School, Nakhimovsky Pr., 47, office 1721(3), Moscow 117418, Russia;2. Barclays Capital, Four Winds Plaza, Bolshaya Gruzinskaya Street 71, Moscow 123056, Russia;3. University of Sydney Business School and CIREQ, Sydney NSW 2006, Australia;4. St.Petersburg State University, St.Petersburg 199034, Russia |
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| Abstract: | In this paper we analyze and interpret the quote price dynamics of 100 NYSE stocks stratified by trade frequency. We specify an error-correction model for the log difference of the bid and the ask price with the spread acting as the error-correction term, and include as regressors the characteristics of the trades occurring between quote observations, if any. From this model we are also able to extract the implied model for the spread and the mid-quote. We find that short duration and medium volume trades have the largest impacts on quote prices for all one hundred stocks. Further, we find that buys have a greater impact on the ask price than on the bid price, while sells have a greater impact on the bid price than on the ask price. Both buys and sells increase spreads in the short run, but in the absence of further trades, the spreads mean revert. Trades have a greater impact on quotes for the infrequently traded stocks than for the more actively traded stocks. |
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