Time and the Price Impact of a Trade: A Structural Approach

Working Paper University of Mannheim and University of Tübingen

38 Pages Posted: 5 Mar 2007 Last revised: 21 Mar 2011

See all articles by Oliver Wuensche

Oliver Wuensche

UBS AG - Quantitative Risk Methodology; University of Tuebingen

Erik Theissen

University of Mannheim - Finance Area

Joachim Grammig

Eberhard Karls Universitaet Tübingen; Centre for Financial Research (CfR); Center for Financial Studies (CfS)

Date Written: March 20, 2011

Abstract

We revisit the role of time in measuring the price impact of trades using a new empirical method that combines spread decomposition and dynamic duration modeling. Previous studies which have addressed the issue in a vector-autoregressive framework conclude that times when markets are most active are times when there is an increased presence of informed trading. Our empirical analysis based on recent European and U.S. data offers challenging new evidence. We find that as trade intensity increases, the informativeness of trades tends to decrease. We explain this result by the crowding-out of limit orders by market orders during times of ample liquidity. Our study casts doubt on the common wisdom that fast markets bear particularly high adverse selection risks for uninformed market participants.

Keywords: Price impact, trading intensity, dynamic duration models, spread decomposition models, adverse selection risk

JEL Classification: G10, C32

Suggested Citation

Wuensche, Oliver and Theissen, Erik and Grammig, Joachim, Time and the Price Impact of a Trade: A Structural Approach (March 20, 2011). Working Paper University of Mannheim and University of Tübingen. Available at SSRN: https://ssrn.com/abstract=968241 or http://dx.doi.org/10.2139/ssrn.968241

Oliver Wuensche

UBS AG - Quantitative Risk Methodology ( email )

Pelikanstrasse 6/8
Zürich, 8001
Switzerland
+41442347106 (Phone)

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Joachim Grammig (Contact Author)

Eberhard Karls Universitaet Tübingen ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.uni-tuebingen.de/uni/wwo/Grammig/grammigeng.html

Centre for Financial Research (CfR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Center for Financial Studies (CfS) ( email )

Taunusanlage 6
Frankfurt/Germany, D-60329
Germany

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