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Is the Quote Midpoint the Right Point? Empirical Evidence of the Asymmetry of the Effective SpreadPankaj K. JainUniversity of Memphis - Fogelman College of Business and Economics Robert H. JenningsIndiana University Bloomington - Kelley School of Business James E UpsonUniversity of Memphis - Fogelman College of Business and Economics March 2006 Abstract: We use the TORQ and SOD data sets to evaluate the impact of general market sentiment and recent stock specific returns on the effective spread and the accuracy of the Lee and Ready (1991) trade classification algorithm. We identify economically and statistically significant asymmetry in effective spreads, which is positively correlated to market sentiment and recent stock return. The accuracy of the Lee and Ready inference varies with market sentiment and with recent individual stock returns. Buy inferences are more accurate during up markets and sell inferences are more accurate during down markets.
Number of Pages in PDF File: 25 Keywords: Effective Spreads, Market Microstructure, TORQ, SOD, midpoint JEL Classification: G10, G24 working papers seriesDate posted: March 16, 2006Suggested CitationContact Information
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