Quote Changes and Order Imbalances

Marshall E. Blume and Yun K. Wong

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Inventory and asymmetric information models of price formation, as well as the stabilization rules of the NYSE, all have different predictions for the autocorrelation function of bid or ask changes and the relation between bid or ask changes and order imbalances. The actual autocorrelation function of bid or ask changes for NYSE common stocks in 1990 does not conform to any of these predictions: The first order autocorrelation is negative, the second order positive, the third order negative, and so on. There is a weak relation between a particular measure of order imbalance and subsequent quote revisions, consistent with the predictions of some theoretical models of price formation.

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