Bid-Ask Bounce and the Measurement of Price Behaviour Around Block Trades on the Australian Stock Exchange
29 Pages Posted: 28 May 2004
Date Written: September 2003
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: Suggested Citation