Trades and Quotes: A Bivariate Point Process
University of Aarhus - School of Economics and Management; CREATES
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
Journal of Financial Econometrics, Vol. 1, No. 2, pp. 159-188, 2003
This article formulates a bivariate point process to jointly analyze trade and quote arrivals. In microstructure models, trades may reveal private information that is then incorporated into new price quotes. This article examines the speed of this information flow and the circumstances that govern it. A joint likelihood function for trade and quote arrivals is specified in a way that recognizes that an intervening trade sometimes censors the time between a trade and the subsequent quote. Models of trades and quotes are estimated for eight stocks using Trade and Quote database (TAQ) data. The essential finding for the arrival of price quotes is that information flow variables, such as high trade arrival rates, large volume per trade, and wide bid-ask spreads, all predict more rapid price revisions. This means prices respond more quickly to trades when information is flowing so that the price impacts of trades and ultimately the volatility of prices are high in such circumstances.
Keywords: duration analysis, market microstructure, transaction data
Date posted: February 29, 2008