The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options

Chan, Kalok; Chung, Y. Peter; Johnson, Herb

doi:10.2307/2331344

Cited by 137 publications

(118 citation statements)

References 38 publications

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“…A U-shaped intraday volume pattern is found in futures markets by Gannon (1994), Abhyankar et al (1995), ap Gwilym et al (1996), Franses et al (1997), Buckle et al (1998), Piccinato et al (1998) and Tse (1999). A U-shaped intraday pattern in equity volumes is reported by Jain and Joh (1988), McInish and Wood (1990), Stephan and Whaley (1990), Gerety and Mulherin (1992), Foster and Viswanathan (1993), Lee et al (1993), Niemeyer and Sandas (1993), Lehmann and Modest (1994), Atkins and Basu (1995), Chan, Chung and Johnson (1995), Werner and Kleidon (1996), and Madhavan et al (1997). Abhyankar et al (1997) find an M-shaped volume pattern for UK stocks.…”

Section: Previous Empirical Evidencementioning

confidence: 92%

“…In contrast, Franses et al (1997) find a flat distribution of bid-ask spreads across the day for the LIFFE Bund future. U-shaped intraday equity bid-ask spreads are reported by McInish and Wood (1992), Brock and Kleidon (1992), Lee et al (1993), Lehmann and Modest (1994), Chan, Chung and Johnson (1995), Werner and Kleidon (1996), Abhyankar et al (1997), Brockman and Chung (1998), Ahn et al (1999), Levin and Wright (1999) and Madhavan et al (1997). Shifting the focus to order driven markets, Chan, Christie and Schultz (1995) find that Nasdaq bid-ask spreads are flat throughout the day and tail off significantly at the close.…”

Section: Previous Empirical Evidencementioning

confidence: 95%

See 1 more Smart Citation

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

2005

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Financial markets generally, and the spot foreign exchange market in particular, are reputed to be excessively volatile. Previous research has linked this excess volatility to private information. This article re-examines the theory and challenges that link. Empirical evidence suggests that random variation between buy and sell volumes is a more important driver than private information in the spot foreign exchange market. The paper also develops theoretical propositions for the relationships between key market variables on an intraday basis. High frequency data is used to examine the role of private information in explaining well documented intraday patterns that persist in the time series of a number of trade related variables, including return volatility. JEL Classification: F31; G12; G15; D4

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Section: Previous Empirical Evidencementioning

confidence: 92%

Section: Previous Empirical Evidencementioning

confidence: 95%

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

2005

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“…The nodes of the splines are the start of the trade day, 9:30am, and then 10am, 11am, mid-day, 1pm, 2pm, 3pm, 3:30pm and the close of the trade day, 4pm. Chan et al (1995) report that the spread on frequently traded NYSE stocks display a U-shape, that is, that spreads are larger at the beginning and end of the trade day than they are in the middle. We can determine whether this holds when controlling for the regressors described in Table 2, and also look for any systematic patterns that emerge between stocks with different average trade frequencies.…”

Section: Deterministic Time-of-day Effectsmentioning

confidence: 99%

Impacts of trades in an error-correction model of quote prices

Engle

Patton

2004

Journal of Financial Markets

129

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In this paper we analyze and interpret the quote price dynamics of 100 NYSE stocks stratified by trade frequency. We specify an error-correction model for the log difference of the bid and the ask price with the spread acting as the error-correction term, and include as regressors the characteristics of the trades occurring between quote observations, if any. From this model we are also able to extract the implied model for the spread and the mid-quote. We find that short duration and medium volume trades have the largest impacts on quote prices for all one hundred stocks. Further, we find that buys have a greater impact on the ask price than on the bid price, while sells have a greater impact on the bid price than on the ask price. Both buys and sells increase spreads in the short run, but in the absence of further trades, the spreads mean revert. Trades have a greater impact on quotes for the infrequently traded stocks than for the more actively traded stocks. r

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“…It is lowest at the beginning of the day, gradually increasing after the Asian lunch break until London's early afternoon before finally declining during the New York evening. As evident from Figure 2, this pattern contradicts the Ushape in spreads typically documented for stocks, for example in Brock and Kleidon (1992) and Chang, Chung and Johnson (1995) among others, in organized exchanges, like the NYSE, that are characterized by formal opening and closing hours. Interestingly enough, the intra-day pattern of volatility seems to mimic that of the standardized spread.…”

Section: -2 Data Characteristics and Bid-ask Spread Analysismentioning

confidence: 60%

The Microstructure of Currency Markets: An Empirical Model of Intra-day Return and Bid-Ask Spread Behavior

Pasquariello

2001

SSRN Journal

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This paper analyzes the intra-day relationship between bid-ask spreads and "market" return volatility for quotes posted in a truly global "around-the-clock" market setting, the one for the U.S. Dollar/Deutschemark exchange rate. We are able to identify a statistically and economically significant "Reverse U-shaped" pattern in the bid-offer spread in 1996. Tests of the stability and ordering of "market" volatility, performed across several different fractions of the day, reveal that variances of intra-day returns are heterogeneous and ordered, declining around the Asian lunch break, increasing steadily during the London morning trading hours, peaking at the opening of New York to subsequently fall with the closing of the European markets. Results also indicate that "market" volatility is significantly higher during intra-day versus overnight periods. Then, we introduce a structural model that attempts to explain those empirical regularities by capturing some currencyspecific features of the data: possibly asymmetric and stochastic trading cost structure, discrete directional updates and parameters' temporal heterogeneity, and by relating the bid-ask spread to two different sources of variation: trading costs and market risk. We evaluate these components via GMM using a set of convenient unconditional intra-day moments implied by the basic configuration of the model. Analysis of the resulting estimated patterns reveals that trading costs play a significant role in explaining the intra-day variability of bid and offer currency returns. Inventory considerations appear to be more relevant in the trading morning and by London's closing, while the perceived risk of arrival of informed trades seems more likely to affect the dealers' cost structure during the late morning/early afternoon in London, when the bid-ask spread is highest. The contribution of the "true" currency risk to the total variability of the posted bid and ask quotes' returns is not surprisingly highest at the opening of the European markets. Jumps are more likely to occur during the London morning hours and less likely by the end of the day. Additionally, the estimated upward jump size is higher than the estimated discrete downward adjustment. This evidence suggests that during 1996 central banks unsuccessfully attempted to resist the devaluation trend of the Deutschemark versus the dollar. JEL Classification: C51, F31

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The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options

Cited by 137 publications

References 38 publications

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

Private Information, Excessive Volatility and Intraday Empirical Regularities in the Spot Foreign Exchange Market

Impacts of trades in an error-correction model of quote prices

The Microstructure of Currency Markets: An Empirical Model of Intra-day Return and Bid-Ask Spread Behavior

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