Estimating the Determinants of Stock Price Changes
17 Pages Posted: 28 Mar 2004 Last revised: 19 Dec 2007
Date Written: January 2004
I develop an approach for estimating the determinants of stock price changes that uses all eligible trade data and other observable parameters of market activity. This approach backs out the unobserved continuous price change distribution from the observable discrete price changes, and does not constrain the determinants to be proportions of the traded bid-ask spread. I show that theoretically impermissible results and skewed estimates of cost components are obtained when the model used for estimating the determinants of stock price changes does not attempt to uncover the mapping between the observed price changes and the underlying unobserved continuous price change process, and does not effectively use all eligible trade data.
Keywords: Stock price change determinants, Bid-ask spread
JEL Classification: G10
Suggested Citation: Suggested Citation