Bid-Ask Bounce and the Measurement of Price Behaviour Around Block Trades on the Australian Stock Exchange

29 Pages Posted: 28 May 2004

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Andrew Lepone

University of Sydney; Financial Research Network (FIRN)

Elvis Jarnecic

The University of Sydney; Financial Research Network (FIRN)

Date Written: September 2003

Abstract

This paper analyses the price behaviour surrounding block transactions on the Australian Stock Exchange. Previous research documents a price reversal following block sales and a price continuation following block purchases - an 'asymmetry' in the price reaction to block sales and block purchases. In this paper we examine whether this asymmetry results from measurement error caused by bid-ask bounce. We first replicate the asymmetry documented in previous literature using returns calculated from trade prices. We then repeat these tests using returns calculated from bid-ask quotes which are free of bid-ask bounce. Our results indicate that when quote returns are used instead of trade returns, price continuations follow both purchases and sales. We conclude that the asymmetry in price behaviour following block trades is driven by bid-ask bounce.

Keywords: Block Trades, Market Microstructure

JEL Classification: G12, G15

Suggested Citation

Frino, Alex and Lepone, Andrew and Jarnecic, Elvis, Bid-Ask Bounce and the Measurement of Price Behaviour Around Block Trades on the Australian Stock Exchange (September 2003). Available at SSRN: https://ssrn.com/abstract=487622 or http://dx.doi.org/10.2139/ssrn.487622

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Andrew Lepone (Contact Author)

University of Sydney ( email )

University of Sydney
Sydney NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Elvis Jarnecic

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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