Is the Quote Midpoint the Right Point? Empirical Evidence of the Asymmetry of the Effective Spread
25 Pages Posted: 16 Mar 2006
Date Written: March 2006
We use the TORQ and SOD data sets to evaluate the impact of general market sentiment and recent stock specific returns on the effective spread and the accuracy of the Lee and Ready (1991) trade classification algorithm. We identify economically and statistically significant asymmetry in effective spreads, which is positively correlated to market sentiment and recent stock return. The accuracy of the Lee and Ready inference varies with market sentiment and with recent individual stock returns. Buy inferences are more accurate during up markets and sell inferences are more accurate during down markets.
Keywords: Effective Spreads, Market Microstructure, TORQ, SOD, midpoint
JEL Classification: G10, G24
Suggested Citation: Suggested Citation