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Intraday trade in dealership markets

Bernhardt, Dan and Hughson, Eric (2002) Intraday trade in dealership markets. European Economic Review, 46 (9). pp. 1697-1732. ISSN 0014-2921. doi:10.1016/S0014-2921(02)00244-1.

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We develop and test a structural asymmetric information transaction model to characterize the price impact of information when markets are thin. Since orders are accepted individually, the model allows for transaction costs and brokerage fees. Equilibrium demands mixed entry strategies on the part of potentially informed traders. Estimation of the structural parameters is performed using a maximum likelihood procedure on NYSE data. The structural model is rejected primarily because the nonlinear restrictions do not allow for sufficient correlation between price movements and pricing errors. This leads to unreasonably low estimates of the probability of informed trade relative to an unrestricted alternative. The price impact of information is found to be positive and significant, but economically small. This is because although the amount of private information is substantial, the quality of the information signals is poor, particularly in the middle of the trading day. Informed agents do not trade small quantities, which suggests that their ability to divide orders is limited by transaction costs.

Item Type:Article
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Additional Information:© 2002 Elsevier Science B.V. Available online 9 October 2002.
Subject Keywords:Market microstructure; Structural estimation
Issue or Number:9
Classification Code:JEL: C5; G0
Record Number:CaltechAUTHORS:20170829-090518602
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Official Citation:Dan Bernhardt, Eric Hughson, Intraday trade in dealership markets, European Economic Review, Volume 46, Issue 9, October 2002, Pages 1697-1732, ISSN 0014-2921, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80892
Deposited By: Tony Diaz
Deposited On:29 Aug 2017 16:25
Last Modified:15 Nov 2021 19:39

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