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Time and the Price Impact of a Trade: A Structural ApproachOliver WuenscheUBS AG - Quantitative Risk Methodology; University of Tuebingen Erik TheissenUniversity of Mannheim - Finance Area Joachim GrammigEberhard Karls Universitaet Tübingen; Center for Financial Studies (CfS); Centre for Financial Research (CfR) March 20, 2011 Working Paper University of Mannheim and University of Tübingen 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. We explain this result by the crowding-out of limit orders by market orders during times of ample liquidity. Our study casts doubt on the common wisdom that fast markets bear particularly high adverse selection risks for uninformed market participants.
Number of Pages in PDF File: 38 Keywords: Price impact, trading intensity, dynamic duration models, spread decomposition models, adverse selection risk JEL Classification: G10, C32 working papers seriesDate posted: March 5, 2007 ; Last revised: March 21, 2011Suggested CitationContact Information
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