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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

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  • Ken Nyholm

    (European Central Bank, Risk Management Division, Kaiserstrasse 29 D-60311 Frankfurt am Main, Germany)

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.

Suggested Citation

  • Ken Nyholm, 2003. "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," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 457-470.
    • Handle: RePEc:jae:japmet:v:18:y:2003:i:4:p:457-470
    DOI: 10.1002/jae.707
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    References listed on IDEAS

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    Cited by:

    1. David Abad & Antonio Rubia, 2004. "Estimating The Probability Of Informed Trading: Further Evidence From An Order-Driven Market," Working Papers. Serie AD 2004-38, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Giovanni Luca & Giampiero Gallo, 2009. "Time-Varying Mixing Weights in Mixture Autoregressive Conditional Duration Models," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 102-120.
    3. David Abad & Antonio Rubia, 2005. "Modelos De Estimacion De La Probabilidad De Negociacion Informada: Una Comparacion Metodologica En El Mercado Español," Working Papers. Serie EC 2005-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Pedeli, Xanthi & Karlis, Dimitris, 2013. "Some properties of multivariate INAR(1) processes," Computational Statistics & Data Analysis, Elsevier, vol. 67(C), pages 213-225.

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