The Price Impact of Trades in Illiquid Stocks in Periods of High and Low Market Activity

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Abstract

Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and its relation to the trading intensity.While the price impact curve for frequently traded stocks monotonically increases towards the full information price, we find impulse response functions that first 'over-shoot' and subsequently decrease towards the full information price.The overshooting effect strongly depends upon the bid-ask spread and the trading intensity, which can be explained by inventory imbalances and asymmetric information of informed and uninformed traders.Furthermore, we show that the difference in price impact between periods of slow and fast trading is much larger for illiquid stocks than for frequently traded stocks.We model the overnight behavior of the trading intensity and returns and show that information contained in the trading intensity of illiquid stocks is carried over to the next day.Additionally, we show that, for infrequently traded stocks, it may take several days before the full information price that follows a trade is attained, even in periods of relatively high market activity.Moreover, the adjustment time crucially depends upon the bid-ask spread and the trading intensity.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages33
Volume2002-29
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-29

Fingerprint

Price impact
Market activity
Trade intensity
Bid/ask spread
High-frequency data
Traders
Asymmetric information
Overshoot
Impulse response function
Information content
Imbalance
Overshooting

Keywords

  • prices
  • trade
  • duration analysis
  • asymmetric information

Cite this

Spierdijk, L., Nijman, T. E., & van Soest, A. H. O. (2002). The Price Impact of Trades in Illiquid Stocks in Periods of High and Low Market Activity. (CentER Discussion Paper; Vol. 2002-29). Tilburg: Econometrics.
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abstract = "Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and its relation to the trading intensity.While the price impact curve for frequently traded stocks monotonically increases towards the full information price, we find impulse response functions that first 'over-shoot' and subsequently decrease towards the full information price.The overshooting effect strongly depends upon the bid-ask spread and the trading intensity, which can be explained by inventory imbalances and asymmetric information of informed and uninformed traders.Furthermore, we show that the difference in price impact between periods of slow and fast trading is much larger for illiquid stocks than for frequently traded stocks.We model the overnight behavior of the trading intensity and returns and show that information contained in the trading intensity of illiquid stocks is carried over to the next day.Additionally, we show that, for infrequently traded stocks, it may take several days before the full information price that follows a trade is attained, even in periods of relatively high market activity.Moreover, the adjustment time crucially depends upon the bid-ask spread and the trading intensity.",
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Spierdijk, L, Nijman, TE & van Soest, AHO 2002 'The Price Impact of Trades in Illiquid Stocks in Periods of High and Low Market Activity' CentER Discussion Paper, vol. 2002-29, Econometrics, Tilburg.

The Price Impact of Trades in Illiquid Stocks in Periods of High and Low Market Activity. / Spierdijk, L.; Nijman, T.E.; van Soest, A.H.O.

Tilburg : Econometrics, 2002. (CentER Discussion Paper; Vol. 2002-29).

Research output: Working paperDiscussion paperOther research output

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N1 - Pagination: 33

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AB - Using high frequency data on ten infrequently traded stocks during the year 1999, we measure the information content of a trade and its relation to the trading intensity.While the price impact curve for frequently traded stocks monotonically increases towards the full information price, we find impulse response functions that first 'over-shoot' and subsequently decrease towards the full information price.The overshooting effect strongly depends upon the bid-ask spread and the trading intensity, which can be explained by inventory imbalances and asymmetric information of informed and uninformed traders.Furthermore, we show that the difference in price impact between periods of slow and fast trading is much larger for illiquid stocks than for frequently traded stocks.We model the overnight behavior of the trading intensity and returns and show that information contained in the trading intensity of illiquid stocks is carried over to the next day.Additionally, we show that, for infrequently traded stocks, it may take several days before the full information price that follows a trade is attained, even in periods of relatively high market activity.Moreover, the adjustment time crucially depends upon the bid-ask spread and the trading intensity.

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KW - duration analysis

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