Bid-Ask Spreads, Quoted Depths, and Unexpected Duration between Trades
41 Pages Posted: 14 Jan 2013
Date Written: January 13, 2013
We examine the intra-day informational effects of unexpected duration between trades on bid-ask spreads and depths. The difference between realized duration and the prediction from an autoregressive conditional duration model is used as a proxy for unexpected duration. We find that unexpected short duration increases the quoted spread as well as the adverse-selection component of the spread. Unexpected duration accompanying buyer-initiated trades has a larger impact on the quoted spread than that accompanying seller-initiated trades. These results are consistent with both information uncertainty in Easley and O'Hara (1992) and the effect of short-sales constraints in Diamond and Verrecchia (1987). Moreover, we find some weak evidence that unexpected short duration increases quoted depths, suggesting that the overall liquidity impact of information asymmetry is more complicated than previously thought.
Keywords: autoregressive conditional duration model, bid-ask spread, information asymmetry, quoted depth, unexpected duration
JEL Classification: G10, G12
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