Time and the price impact of a trade: A structural approach

Joachim G. Grammig, Erik Theissen and Oliver Wünsche

No 2011/08, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We revisit the role of time in measuring the price impact of trades using a new empirical method that combines spread decomposition and dynamic duration modeling. Previous studies which have addressed the issue in a vector-autoregressive framework conclude that times when markets are most active are times when there is an increased presence of informed trading. Our empirical analysis based on recent European and U.S. data offers challenging new evidence. We find that as trade intensity increases, the informativeness of trades tends to decrease. This result is consistent with the predictions of Admati and Pfleiderer's (1988) rational expectations model, and also with models of dynamic trading like those proposed by Parlour (1998) and Foucault (1999). Our results cast doubt on the common wisdom that fast markets bear particularly high adverse selection risks for uninformed market participants.

Keywords: Price Impact of Trades; Trading Intensity; Dynamic Duration Models; Spread Decomposition Models; Adverse Selection Risk (search for similar items in EconPapers)
JEL-codes: C32 G10 (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Time and price impact of a trade: A structural approach (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:201108

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