Information Environments and High Price Impact Trades: Implication for Volatility and Price Efficiency

57 Pages Posted: 25 Jun 2019

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Xiaozhou Zhou

University of Quebec at Montreal (UQAM) - School of Management (ESG)

Date Written: June 18, 2019

Abstract

Using high-frequency transaction and Limit Order Book (LOB) data, we extend the identification dimensions of High Price Impact Trades (HPITs) by using LOB matchedness. HPITs are trades associated with disproportionately large price changes relative to their proportion of volume. We find that a higher presence of HPITs leads to a decline in volatility due to more contrarian trades against uninformed traders, but this decline varies with information environments and liquidity levels. Further, we show that more HPITs lead to higher price efficiency for stocks with greater public disclosure and higher liquidity. Our empirical results provide evidence that HPITs mainly reflect fundamental-based information in a high public information environment, and belief-based information in a low public information environment.

Keywords: Price efficiency, Price discovery, Limit Order Book, Trade size clustering, Stealth trading

JEL Classification: C22, C41, C53, G11

Suggested Citation

Dionne, Georges and Zhou, Xiaozhou, Information Environments and High Price Impact Trades: Implication for Volatility and Price Efficiency (June 18, 2019). Available at SSRN: https://ssrn.com/abstract=3406919 or http://dx.doi.org/10.2139/ssrn.3406919

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Xiaozhou Zhou

University of Quebec at Montreal (UQAM) - School of Management (ESG) ( email )

315, rue Sainte-Catherine Est
Montreal, Quebec H2X 3X2
Canada
514 987 3000 ext 0999 (Phone)

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