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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27092

Title: Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks
Authors: Madhavan, Ananth
Richardson, Matthew
Roomans, Mark
Issue Date: Nov-1996
Series/Report no.: FIN-96-034
Abstract: This paper develops a structural model of intraday price formation that embodies both information shocks and microstructure effects in an internally consistent, unified setting. The model allows us to better understand the observed intra-day patterns in bid-ask spreads, price volatility, transaction costs, as well as the autocorrelations of transaction returns and quote revisions. For example, the model simultaneously sheds light on why, over the day, (i) the variance of transaction price changes is U-shaped while the variance of ask price changes is declining, (ii) the bid-ask spread is U-shaped although information asymmetry and uncertainty over fundamentals is decreasing, and (iii) the autocorrelations of transaction price changes are large and negative, yet the autocorrelations of ask price changes are small and negative. In addition, the model’s parameters also provide a natural metric of price discovery and effective trading costs, which may prove useful in future studies.
URI: http://hdl.handle.net/2451/27092
Appears in Collections:Finance Working Papers

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