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Rev Fin 1997; 10:1035-1064
© 1997 the Society for Financial Studies

Article

Why do security prices change? A transaction-level analysis of NYSE stocks

A Madhavanz, M Richardson1 and M Roomans2
1 New York University and NBER, USA
2 JP Morgan Investment Management Inc., USA
z Corresponding author at: Marshall School of Business, University of Southern California, Los Angeles, CA 90089-1421, USA

Abstract

This article develops and tests a structural model of intraday price formation that embodies public information shocks and microstructure effects. We use the model to analyze intraday patterns in bid-ask spreads, price volatility, transaction costs, and return and quote auto-correlations, and to construct metrics for price discovery and effective trading costs. Information asymmetry and uncertainty over fundamentals decrease over the day, although transaction costs increase. The results help explain the U-shaped pattern in intraday bid-ask spreads and volatility, and are also consistent with the intra-day decline in the variance of ask price changes.


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