Invariance of Buy-Sell Switching Points

27 Pages Posted: 11 Feb 2016 Last revised: 30 Oct 2016

See all articles by Kyoung-hun Bae

Kyoung-hun Bae

Ulsan National Institute of Science and Technology

Albert S. Kyle

University of Maryland

Eun Jung Lee

Hanyang University

Anna A. Obizhaeva

New Economic School (NES)

Date Written: October 26, 2016

Abstract

Define the number of buy-sell “switching points” as the number of times that individual traders change the direction of their trading. Based on the hypothesis that switching points take place in business time, market microstructure invariance predicts that the aggregate number of switching points is proportional to the 2/3 power of the product of dollar volume and volatility. Using trading data from the Korea Exchange (KRX) from 2008 to 2010, we estimate the exponent to be 0.675 with standard error of 0.005. Invariance explains about 93% of the variation in the logarithm of the number of switching points each month across stocks. Most of the variation represents changes in the number of accounts trading the stock and not the number of switching points per account.

Keywords: finance, market microstructure, invariance, trading volume, volatility, liquidity, price impact, market depth

JEL Classification: G00, G12, G14

Suggested Citation

Bae, Kyoung-hun and Kyle, Albert (Pete) S. and Lee, Eun Jung and Obizhaeva, Anna A., Invariance of Buy-Sell Switching Points (October 26, 2016). Robert H. Smith School Research Paper No. RHS 2730770, Available at SSRN: https://ssrn.com/abstract=2730770 or http://dx.doi.org/10.2139/ssrn.2730770

Kyoung-hun Bae

Ulsan National Institute of Science and Technology ( email )

gil 50
Ulsan, 689-798
Korea, Republic of (South Korea)

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Eun Jung Lee

Hanyang University ( email )

505 KyoungSang Kwan, 55 Hanyangdaehak-ro,
Sangrok, Ansan, Kyeonggi-do
15588
82-31-400-5645 (Phone)

Anna A. Obizhaeva (Contact Author)

New Economic School (NES) ( email )

100A Novaya ul
Moscow, Skolkovo 143026
Russia

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