An Ordered Probit Analysis of Transaction Stock Prices (Reprint 029)
Andrew Lo () and
Craig A. MacKinlay
Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research
We estimate the conditional distribution of trade-to-trade price changes using ordered probit, a statistical model for discrete random variables. Such an approach takes into account the fact that transaction price changes occur in discrete increments, typically eighths of a dollar, and occur at irregularly spaced time intervals. Unlike existing continuous-time/discrete-state models of discrete transaction prices, ordered probit can capture the effects of other economic variables on price exchanges, such as volume, past price changes, and the time between trades. Using 1988 transactions data for over 100 randomly chosen U.S. stocks, we estimate the ordered probit model via maximum likelihood and use the parameter estimates to measure several transaction-related quantities, such as the price impact of trades of a given size, the tendency towards price reversals from one transaction to the next, and the empirical significance of price discreteness.
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Persistent link: https://EconPapers.repec.org/RePEc:fth:pennfi:26-91
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