Is the Quote Midpoint the Right Point? Empirical Evidence of the Asymmetry of the Effective Spread

25 Pages Posted: 16 Mar 2006  

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance

James E Upson

University of Memphis - Fogelman College of Business and Economics

Date Written: March 2006

Abstract

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

Jain, Pankaj K. and Jennings, Robert H. and Upson, James E, Is the Quote Midpoint the Right Point? Empirical Evidence of the Asymmetry of the Effective Spread (March 2006). Available at SSRN: https://ssrn.com/abstract=891134 or http://dx.doi.org/10.2139/ssrn.891134

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Robert H. Jennings

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-2696 (Phone)
812-855-5875 (Fax)

James E Upson (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Paper statistics

Downloads
320
Rank
75,587
Abstract Views
1,602