Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks

Working Paper, University of Pennsylvania

Posted: 25 Sep 1999

See all articles by Ananth Madhavan

Ananth Madhavan

BlackRock, Inc.

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Mark Roomans

J.P. Morgan Investment Management Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: August 1994

Abstract

This paper develops a structural model of intraday price formation that embodies both public information shocks and microstructure effects. Due to its structural nature, the model's underlying parameters provide summary measures to assess trading costs, the sources of short-run price volatility, and the speed of price discovery in an internally consistent, unified setting. We estimate the model using transaction level data for a cross-section of NYSE stocks. We find, for example, that the parameter estimates jointly explain the observed U-shaped pattern in quoted bid-ask spreads and in price volatility, the magnitude of transaction price volatility due to market frictions, and the autocorrelation patterns of transaction returns and quote revisions. Further, in contrast to bid- ask spread patterns, we find that execution costs of a trade are much smaller than the spread and increase monotonically over the course of the day. This may provide an explanation for why there is concentration in trade at the open.

JEL Classification: G14

Suggested Citation

Madhavan, Ananth and Richardson, Matthew P. and Roomans, Mark, Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks (August 1994). Working Paper, University of Pennsylvania. Available at SSRN: https://ssrn.com/abstract=5548

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
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New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Mark Roomans

J.P. Morgan Investment Management Inc.

522 Fifth Ave., 9th Floor
New York, NY 10036
United States

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