Why Do Security Prices Change? A Transaction-Level Analysis of Nyse Stocks

43 Pages Posted: 11 Nov 2008

See all articles by Ananth Madhavan

Ananth Madhavan

BlackRock, Inc.

Mark Roomans

J.P. Morgan Investment Management Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: November 1996

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.

Suggested Citation

Madhavan, Ananth and Roomans, Mark, Why Do Security Prices Change? A Transaction-Level Analysis of Nyse Stocks (November 1996). NYU Working Paper No. FIN-96-034. Available at SSRN: https://ssrn.com/abstract=1298299

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Mark Roomans

J.P. Morgan Investment Management Inc.

522 Fifth Ave., 9th Floor
New York, NY 10036
United States

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