An Empirical Analysis of Strategic Behaviour Models

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