2005
DOI: 10.1007/s00181-005-0006-9
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Asymmetries in bid and ask responses to innovations in the trading process

Abstract: This paper proposes a new approach to jointly model the trading process and the revisions of market quotes. This method accommodates asymmetries in the dynamics of ask and bid quotes after trade related shocks. The empirical spec ification is a vector error correction (VEC) model for ask and bid quotes, with the spread as the co integrating vector, and with an endogenous trading process. This model extends the vector autoregressive (VAR) model introduced by Hasbrouck (Hasbrouck J (1991) Measuring the informati… Show more

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Cited by 28 publications
(22 citation statements)
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References 67 publications
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“…A nice feature of our framework is that we are able to extract the implied vector autoregression (VAR) for the spread and the mid-quote from our model for the bid and ask prices. A similar structure has been independently proposed by Escribano and Pascual (2000). Dufour and Engle (2000) and Engle and Lange (2001) find that various measures of liquidity deteriorate when trading becomes more active.…”
Section: Introductionsupporting
confidence: 56%
“…A nice feature of our framework is that we are able to extract the implied vector autoregression (VAR) for the spread and the mid-quote from our model for the bid and ask prices. A similar structure has been independently proposed by Escribano and Pascual (2000). Dufour and Engle (2000) and Engle and Lange (2001) find that various measures of liquidity deteriorate when trading becomes more active.…”
Section: Introductionsupporting
confidence: 56%
“…Engle and Patton (2004) whether this impact is permanent or only transitory. Using impulse-response analysis based on a structural VEC model, Escribano and Pascual (2006) also find that spreads (permanently) widen after the arrival of trades. Note that these effects contradict implications of asymmetric information based market microstructure models, such as Glosten and Milgrom (1985) and Easley and O'Hara (1992), where trades should resolve the uncertainty regarding existing information and should result in declining spreads.…”
Section: Limit Orders Placed Inside Of the Spreadmentioning
confidence: 92%
“…Cointegration analysis reveals a stationary linear combination of bid and ask quotes which closely resembles the bid-ask spread. The idea of jointly modelling ask and bid quote dynamics in terms of a cointegrated system originates from Engle and Patton (2004) based on the work of Hasbrouck (1991) and has been used in other approaches, such as Hansen and Lunde (2006) and Escribano and Pascual (2006). Our setting extends and modifies this approach in two major respects: Firstly, we model quotes and depth simultaneously.…”
mentioning
confidence: 99%
“…Hasbrouck (1993) proposes decomposing security transaction prices into a random walk component and stationary error components. Engle and Patton (2004) and Escribano and Pascual (2006) extend the framework by Hasbrouck (1991) and propose a vector error correction model for bid and ask quotes with the spread acting as the co-integrating vector. Madhavan, Richardson, and Roomans (1997) introduce a structural model of price formation by decomposing transaction price volatility into volatility arising from news shocks (trade-unrelated information) and volatility arising from market frictions such as price discreteness, asymmetric information, and real frictions.…”
Section: Introductionmentioning
confidence: 99%