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Bid-Ask Spread, Quoted Depths, and Unexpected Duration Between Trades

Author

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  • Jun (Tony) Ruan

    (Xiamen University)

  • Tongshu Ma

    (State University of New York at Binghamton)

Abstract

We examine the intraday informational and liquidity effects of unexpected duration between trades on bid-ask spreads and depths. The difference between realized duration and the predicted duration from an autoregressive conditional duration model is used as a proxy for unexpected duration. We find that unexpected short duration alone permanently increases the quoted spread and positively correlates with the adverse-selection component of the effective spread, despite the presence of a liquidity component in the spread adjustment. Unexpected duration for a buyer-initiated trade has a stronger impact on the quoted spread than that for a seller-initiated trade. These results support the implications of information uncertainty in Easley and O’Hara (J Financ 47(2):577–605 1992) and short-sales constraints in Diamond and Verrecchia (J Financ Econ 18:277–311 1987) for the price adjustment behavior. Moreover, we show that unexpected short duration for a seller-initiated (buyer-initiated) trade permanently increases (slightly reduces) the bid (ask) depth and that there is also a liquidity component in the adjustment in depths. We attribute the asymmetric effects on depths to the differential informativeness of buyer- and seller-initiated trades.

Suggested Citation

  • Jun (Tony) Ruan & Tongshu Ma, 2017. "Bid-Ask Spread, Quoted Depths, and Unexpected Duration Between Trades," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(3), pages 385-436, June.
    • Handle: RePEc:kap:jfsres:v:51:y:2017:i:3:d:10.1007_s10693-015-0233-y
    DOI: 10.1007/s10693-015-0233-y
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    References listed on IDEAS

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    1. Fan He & Xuansen He, 2019. "A Continuous Differentiable Wavelet Shrinkage Function for Economic Data Denoising," Computational Economics, Springer;Society for Computational Economics, vol. 54(2), pages 729-761, August.

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    More about this item

    Keywords

    Autoregressive conditional duration model; Unexpected duration; Bid-ask spread; Quoted depths; Information asymmetry; Liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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