Autocorrelation of the Trade Process: Evidence from the Helsinki Stock Exchange
Posted: 16 Jul 2009
Date Written: July 15, 2009
This study investigates how the trade duration-based intensity modifies the first-order autocorrelation and the transitory variance of the trade process. Because prices are conditional expected values, a structural model in which the trade duration represents the rate at which prices incorporate new information is developed. The model is an extension of the Madhavan, Richardson and Roomans (1997) model with the result that parameters characterizing the arrival rate of new information are derived. Testing this model with data from the Helsinki Stock Exchange, it is documented that a model ignoring trading intensity effects on price changes would underestimate the transitory effects of the trade process. This finding entails that the trade duration captures neglected elements of implicit trading costs that increase with market microstructure effects.
Keywords: Trading intensity, trade duration, autocorrelation, order flow
JEL Classification: C30, C41, G14
Suggested Citation: Suggested Citation