On the Importance of Timing Specifications in Market Microstructure Research

25 Pages Posted: 14 Apr 2005

See all articles by Thomas Henker

Thomas Henker

Bond University

Jian-Xin Wang

University of Technology Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2005

Abstract

This paper highlights the importance of timing specifications in empirical market microstructure studies. Small changes in the data matching process and the timing specification of economic variables can significantly alter the outcomes of empirical research. Using the methodology developed by Lee and Ready (1991), we find that their "5-second rule" is no longer appropriate for matching quotes with transactions for NYSE stocks in the TAQ data set. Quotes should be delayed one second when matched with transactions. We demonstrate the significance of the timing specifications of economic variables using the Huang and Stoll (1997) spread decomposition model. Seemingly minor variations from the theoretical model result in severe biases in the estimated parameters. Correcting the timing errors provide much more realistic spread component estimates than those achieved in the literature.

Keywords: Spread components, spread decomposition, adverse selection, timing specification

Suggested Citation

Henker, Thomas and Wang, Jian-Xin, On the Importance of Timing Specifications in Market Microstructure Research (March 30, 2005). Available at SSRN: https://ssrn.com/abstract=698641 or http://dx.doi.org/10.2139/ssrn.698641

Thomas Henker (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61 7 5595-1561 (Phone)

Jian-Xin Wang

University of Technology Sydney ( email )

UTS Business School
Finance Decipline
Sydney, NSW
Australia

Financial Research Network (FIRN)

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

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

Register to save articles to
your library

Register

Paper statistics

Downloads
212
Abstract Views
1,017
rank
62,282
PlumX Metrics