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Measuring the information content of stock trades (1991)
| Venue: | Journal of Finance |
| Citations: | 467 - 11 self |
BibTeX
@ARTICLE{Hasbrouck91measuringthe,
author = {Joel Hasbrouck},
title = {Measuring the information content of stock trades},
journal = {Journal of Finance},
year = {1991},
pages = {179--207}
}
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Abstract
This paper suggests that the interactions of security trades and quote revisions be modeled as a vector autoregressive system. Within this framework, a trade's information effect may be meaningfully measured as the ultimate price impact of the trade innovation. Estimates for a sample of NYSE issues suggest: a trade's full price impact arrives only with a protracted lag; the impact is a positive and concave function of the trade size; large trades cause the spread to widen; trades occurring in the face of wide spreads have larger price impacts; and, information asymmetries are more significant for smaller firms. CENTRALTO THE ANALYSIS of market microstructure is the notion that in a market with asymmetrically informed agents, trades convey information and therefore cause a persistent impact on the security price. The magnitude of the price effect for a given trade size is generally held to be a positive function of the proportion of potentially informed traders in the population, the probability that such a trader is in fact informed (i.e., the probability that a private information signal has in fact been observed), and the preci-sion of the private information. The close dependence of the price impact on these factors, which may be referred to as the extent of the information asymmetry, provides a strong motivation for the empirical determination of this impact. This paper strives to achieve such a determination in a frame-work that is robust to deviations from the assumptions of the formal models. In the process, the framework establishes a rich characterization of the dynamics by which trades and quotes interact. The market considered here is a specialist market in which a designated market-maker exposes bid and ask quotes to the trading public. An extensive theory has evolved that analyzes the market-maker's exposure to traders with superior information. ' Concerning the extent of the information asym-metry, this body of theory yields two important empirical predictions: first,
Keyphrases
information content stock trade information asymmetry price impact trade size vector autoregressive system concave function persistent impact private information wide spread close dependence rich characterization information effect protracted lag market microstructure superior information information asym-metry therefore cause specialist market formal model security trade large trade theory yield positive function trade innovation market-maker expose bid empirical determination nyse issue important empirical prediction ultimate price impact price effect strong motivation security price extensive theory private information signal trading public full price impact
