Price Discovery in Tick Time

36 Pages Posted: 30 Jul 2004

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Peter C. Schotman

Maastricht University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

In this Paper, we propose a tick time model for dealer quote interactions using ultra-high-frequency data. This model includes duration functions to measure the time dependence of volatility, as well as information asymmetry. In order to assess price discovery, we define several measures in tick time. These measures can be aggregated to calendar time, and we define a comparable measure to Hasbrouck (1995) information shares. In our empirical part, we examine the Island and Instinet Electronic Communication Networks, and three wholesale market makers for 20 actively traded stocks with varying liquidity at Nasdaq. Our results include that volatility does not increase with the duration between quote updates, and that longer quote durations lead to lower price discovery. In terms of price discovery, we find that ECNs tend to dominate the liquid stocks, whereas market makers dominate the less liquid stocks.

Keywords: Price discovery, tick time models, NASDAQ, ultra-high frequency data, microstructure

JEL Classification: C32, G15

Suggested Citation

Frijns, Bart and Schotman, Peter C., Price Discovery in Tick Time (June 2004). CEPR Discussion Paper No. 4456. Available at SSRN: https://ssrn.com/abstract=571021

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Peter C. Schotman (Contact Author)

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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