Trading Cost Decomposition During Federal Funds Rate Announcements

40 Pages Posted: 3 Dec 2015 Last revised: 2 Dec 2016

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Ivan Indriawan

Auckland University of Technology - Department of Finance

Yoichi Otsubo

University of Manchester - Alliance Manchester Business School

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Date Written: July 18, 2016

Abstract

We investigate the behaviour of bid-ask spread components around the U.S. Federal Funds Rate announcements for a sample of cross-listed firms in Canada and in the U.S. We use transaction level data to decompose the spread into its three components, namely, information asymmetry, order persistence, and order processing costs. We observe that during news announcements, the information asymmetry component increases more in Canada than in the U.S., indicating that trades in Canada are more information-driven than trades in the U.S. Next, we find that the order persistence component increases more in the U.S. than in Canada, indicating that there is a temporary price pressure surrounding news announcement period in the U.S. These differences may be due to the fact that small individual investors dominate the trading of Canadian stocks in the U.S. while larger investors dominate the trading in Canada. Finally, following the implementation of Regulation National Market System, we observe that liquidity in the U.S. has increased, and subsequently more informed traders are now present in the market, particularly during news announcement period.

Keywords: Macroeconomic News Announcements, Bid-Ask Spreads, Spread Decomposition

JEL Classification: G1, C58, E44

Suggested Citation

Frijns, Bart and Indriawan, Ivan and Otsubo, Yoichi and Tourani-Rad, Alireza, Trading Cost Decomposition During Federal Funds Rate Announcements (July 18, 2016). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2697851 or http://dx.doi.org/10.2139/ssrn.2697851

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Ivan Indriawan (Contact Author)

Auckland University of Technology - Department of Finance ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Yoichi Otsubo

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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