Bid-Ask Spreads, Quoted Depths, and Unexpected Duration between Trades

41 Pages Posted: 14 Jan 2013

See all articles by Tony Ruan

Tony Ruan

Xiamen University

Tongshu Ma

Binghamton University

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2013

Abstract

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

Suggested Citation

Ruan, Tony and Ma, Tongshu, Bid-Ask Spreads, Quoted Depths, and Unexpected Duration between Trades (January 13, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2200125 or http://dx.doi.org/10.2139/ssrn.2200125

Tony Ruan (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Tongshu Ma

Binghamton University ( email )

PO Box 6001
Binghamton, NY 13902-6000
United States

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