The Friction-Free Weighted Price Contribution

37 Pages Posted: 1 Feb 2011 Last revised: 18 Feb 2014

See all articles by David Abad

David Abad

Universidad de Alicante

Roberto Pascual

Universidad de las Islas Baleares

Date Written: January 2014

Abstract

We introduce a methodology to obtain friction-free estimates of Barclay and Warner’s (1993) Weighted Price Contribution (WPC). With this new approach, we verify recent simulation results suggesting that trading frictions may severely bias the WPC approach. We use high frequency data from a European electronic order-driven market to show that frictions generate a sizable downward bias in the WPC of non-aggressive small-size trades. The bias increases in periods of significant price discovery, and is due to both bid-ask bounce and serial correlation in the quote-midpoint changes. Our results are not market specific: we provide evidence of biased WPC estimates in US markets.

Keywords: Weighted price contribution, trading frictions, stealth trading, trade size, aggressiveness, bid-ask bounce, price formation, electronic markets, market microstructure.

JEL Classification: G1

Suggested Citation

Abad, David and Pascual Gascó, Roberto, The Friction-Free Weighted Price Contribution (January 2014). Available at SSRN: https://ssrn.com/abstract=1752230 or http://dx.doi.org/10.2139/ssrn.1752230

David Abad

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, 03690
Spain

Roberto Pascual Gascó (Contact Author)

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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