The Path of Price Discovery: Trade Time vs Clock Time

Abstract

I develop a dimensionless measure of the path of price discovery using public information shocks as an instrument for changes in firm value. I find that price discovery occurs largely through trading. Using high-frequency data, I find substantial cross-sectional variation in the speed of price of price discovery when measured in “real time.” This heterogeneity, however, essentially disappears when measured in “trade time.” Consistent with previous work work, I find that trade time is well approximated by the accumulation of transactions, not share volume, dollar volume, or turnover. These findings support the hypothesis of Kyle and Obizhaeva (2016b) that “information flows take place in the same business time as trading.”

Keywords: Price discovery, trade time, tick, earnings, surprise

JEL Classification: G14