Inferring the private information content of trades: a regime-switching approach

The views presented in the paper are not necessarily shared by the European Central Bank.

Ken Nyholm
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Ken Nyholm: European Central Bank, Risk Management Division, Kaiserstrasse 29 D-60311 Frankfurt am Main, Germany, Postal: European Central Bank, Risk Management Division, Kaiserstrasse 29 D-60311 Frankfurt am Main, Germany

Journal of Applied Econometrics, 2003, vol. 18, issue 4, pages 457-470

Abstract: This paper presents an empirical model for inferring the private information content of trades at the transaction level. The trade-indicator model of Glosten and Harris (1988) is extended to a two-state regime-switching setting, and the model is estimated using tick-by-tick data from the New York Stock Exchange (NYSE). The specialist is found to react in accordance with the proposed model. Bid-ask quotes set after the execution of a trade reflect the conjectured information content of that particular trade. Based on the estimated model four empirical results emerge: (a) the suggested regime-switching model fit data well; (b) the reverse J-shaped pattern of intra-daily quoted spreads is shown to agree with the clustering of costs incurred by the specialist through trading with better-informed agents; (c) on average 9% of all trades are found to reveal private: information to the specialist; (d) results regarding the trading volume of informed traders support the stealth trading hypothesis suggested by Barclay and Warner (1993). Copyright © 2003 John Wiley & Sons, Ltd.

Date: 2003
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