An Empirical Analysis of Strategic Behaviour Models

41 Pages Posted: 3 Feb 2005

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Michael A O'Brien

Schroder Investment Management Limited; University of Queensland - Business School

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: January 2005

Abstract

Existing strategic behaviour models indicate that the strategic interaction of informed and liquidity traders leads to systematic intraday patterns on stock exchanges. This paper uses a unique database from the Helsinki Stock Exchange, which allows the parties of all trades to be identified so that their transactions can be tracked intra-day and over time. We classify traders as either informed or liquidity traders based on their stock picking ability. Consistent with previous research, we illustrate that volume and volatility are concentrated at the open and close of the trading day, while spreads are widest at these times. Both informed and liquidity traders concentrate trading at the open and close. We demonstrate that volume negatively affects spreads, while volatility and the proportion of informed traders positively affect spreads. A new result is the significant increase in the proportion of informed trading across the trading day. Consistent with the strategic behaviour models proposed by Foster and Viswanathan (1996) and Wang (1998), the results illustrate that a significant proportion of intraday patterns can be explained by strategic trading by informed and liquidity traders.

Keywords: Informed trading, liquidity trading, strategic behaviour, intraday patterns

Suggested Citation

Comerton-Forde, Carole and O'Brien, Michael A and Westerholm, P. Joakim, An Empirical Analysis of Strategic Behaviour Models (January 2005). Available at SSRN: https://ssrn.com/abstract=659681 or http://dx.doi.org/10.2139/ssrn.659681

Carole Comerton-Forde (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

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

Michael A O'Brien

Schroder Investment Management Limited ( email )

United States

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
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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