Modelling time-varying asymmetric information component of transaction costs

The main purpose of this paper is to model time-varying asymmetry information costs. To do this, first, we use two classical reduced-form microstructure models defined in a Bayesian hierarchical framework. In this scenario, we consider adverse selection as a random unobserved state variable and we u...

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Bibliographic Details
Published in:Revista española de financiación y contabilidad 2016-10, Vol.45 (4), p.440-465
Main Authors: Pérez-Rodríguez, Jorge V., Negrín-Hernández, Miguel Ángel
Format: Article
Language:English
Subjects:
Adverse selection
adverse selection costs
Bayesian analysis
Bayesian estimates
Cost estimates
costes de selección adversa
estimación bayesiana
Markov analysis
modelos de revisión de precios
Quote revision models
Securities trading
Variables
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Summary:The main purpose of this paper is to model time-varying asymmetry information costs. To do this, first, we use two classical reduced-form microstructure models defined in a Bayesian hierarchical framework. In this scenario, we consider adverse selection as a random unobserved state variable and we use the Markov chain Monte Carlo (MCMC) estimator. And second, we evaluate whether time-varying asymmetric information cost estimates reflect the existence of periodicity (intraday patterns, time-of-day effects) and mean reversion in one stock. This procedure is applied to tick-by-tick quote and trade data on 15 SIBE-listed stocks over the 126 trading days since January-June 2005, estimating the unobserved time-varying costs for different hourly intervals. The main results indicate that our model captures periodicity between trading sessions and time-varying adverse selection costs showing the U-shape intraday pattern and mean reversion.
ISSN:0210-2412
2332-0753
DOI:10.1080/02102412.2016.1236481