Measuring private information in a specialist market

Christopher G. Lamoureux and Qin Wang

Journal of Empirical Finance, 2015, vol. 30, issue C, 92-119

Abstract: Since the reduced forms of the popular measures of asymmetric information in the price formation process are not nested within larger models we cannot evaluate their fit using standard statistical tools. Furthermore, pairwise correlations amongst the measures are small. We benchmark these measures cross-sectionally to realized specialist loss rates (using alternatively volume and number of trades) in the TORQ data. While five of the six measures are significantly correlated with this benchmark, this is only because they are correlated with the specialist participation rate. We infer that the measures do not measure private information in order flow, even in the setting for which they are designed.

Keywords: Specialist market; Measuring adverse selection; Realized specialist loss rate; Specialist participation rate (search for similar items in EconPapers)
JEL-codes: G12 G14 G20 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:30:y:2015:i:c:p:92-119

DOI: 10.1016/j.jempfin.2014.10.002

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