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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26697

Authors: Engle, Robert F.
Patton, Andrew J.
Keywords: market microstructure
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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