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Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26697
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| Title: | IMPACTS OF TRADES IN AN ERROR-CORRECTION MODEL OF QUOTE PRICES |
| Authors: | Engle, Robert F.
Patton, Andrew J. |
| Keywords: | market microstructure
error-correction
vector autoregression
price dynamics |
| Issue Date: | 22-Aug-2000 |
| Series/Report no.: | FIN-00-033 |
| Abstract: | In this paper we analyze and interpret the quote price dynamics of 100
NYSE stocks with varying average trade frequencies. 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. We find that short duration and medium volume
trades have the largest impacts on quote prices for all one hundred
stocks, and that buyer initiated trades primarily move the ask price
while seller initiated trades primarily move the bid price. Trades have
a greater impact on quotes in both the short and the long run for the
infrequently traded stocks than for the more actively traded stocks.
Finally, we find strong evidence that the spread is mean reverting. |
| URI: | http://hdl.handle.net/2451/26697 |
| Appears in Collections: | Finance Working Papers
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