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Impacts of Trades in an Error-Correction Model of Quote Prices

UCSD Economics Working Paper No. 2000-26; Twelfth Annual Utah Winter Finance Conference

40 Pages Posted: 17 Apr 2001  

Andrew J. Patton

Duke University - Department of Economics

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2001

Abstract

In this paper we analyze and interpret the quote price dynamics of 100 NYSE stocks stratified by trade frequency. We specify an error-correction model for the log difference of the bid and the ask price with the spread acting as the error-correction term, and include as regressors the characteristics of the trades occurring between quote observations, if any. From this model we are also able to extract the implied model for the spread and the mid-quote. We find that short duration and medium volume trades have the largest impacts on quote prices for all one hundred stocks. Further, we find that buys have a greater impact on the ask price than on the bid price, while sells have a greater impact on the bid price than on the ask price. Both buys and sells increase spreads in the short run, but in the absence of further trades, the spreads mean revert. Trades have a greater impact on quotes for the infrequently traded stocks than for the more actively traded stocks.

Keywords: market microstructure, error-correction, vector autoregression, price dynamics

JEL Classification: C32, G0, G1

Suggested Citation

Patton, Andrew J. and Engle, Robert F., Impacts of Trades in an Error-Correction Model of Quote Prices (December 15, 2001). UCSD Economics Working Paper No. 2000-26; Twelfth Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=256033 or http://dx.doi.org/10.2139/ssrn.256033

Andrew J. Patton (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~ap172/

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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