Asymmetries in Bid and Ask Responses to Innovations in the Trading Process

40 Pages Posted: 11 Jul 2001 Last revised: 6 Oct 2014

See all articles by Álvaro Escribano

Álvaro Escribano

Universidad Carlos III de Madrid - Department of Economics

Roberto Pascual

Universidad de las Islas Baleares

Date Written: October 1, 2000

Abstract

This paper proposes a new approach to jointly model the trading process and the revisions of market quotes. This method accommodates asymmetries in the dynamics of ask and bid quotes after trade-related shock. The empirical specification is a vector error correction (VEC) model for ask and bid quotes, with the spread as the co-integrating vector, and with an endogenous trading process. This model extends the vector autoregressive (VAR) model introduced by Hasbrouck (1991). We provide evidence against several symmetry assumptions, very familiar among microstructure models. We report asymmetric adjustments of ask and bid prices to trade-related shocks, and asymmetric impacts of buyer and seller-initiated trades. In general, buys are more informative than sells. The likelihood of symmetric quote responses increases with volatility. We show that our findings are robust across different model specifications, time frequencies, and trading periods. Moreover, we find similar asymmetries in markets with different microstructures.

Keywords: Market Microstructure, bid and ask time series, VEC models, adverse-selection costs, asymmetric dynamics

JEL Classification: G1

Suggested Citation

Escribano, Álvaro and Pascual Gascó, Roberto, Asymmetries in Bid and Ask Responses to Innovations in the Trading Process (October 1, 2000). Empirical Economics, 30, 913-946 (2006), Available at SSRN: https://ssrn.com/abstract=276544 or http://dx.doi.org/10.2139/ssrn.276544

Álvaro Escribano (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 6249854 (Phone)
+34-91 6249329 (Fax)

HOME PAGE: http://www.eco.uc3m.es/english/staff/contact_info/

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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