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The accuracy of spread decomposition models in capturing informed trades: Evidence from the London Stock Exchange and behavioural implications

Gregoriou, Andros; Rhodes, Mark

Authors

Andros Gregoriou

Mark Rhodes



Abstract

Purpose – The purpose is to examine the empirical relationship between trades undertaken by informed agents (managers) and the proxies for informed trades computed by bid-ask spread decomposition models. Design/methodology/approach – An econometric application of spread decomposition models to data from the London Stock Exchange, with an examination of whether the model predictions are co-integrated with actual outcomes. Findings – We find overwhelming evidence of non stationary behaviour between the actual and predicted informed trade prices. Our findings suggest that there is a clear need for an alternative to extant spread decomposition models perhaps incorporating findings from behavioural finance. Originality/value – Given the importance of stock market liquidity and the extensive use of spread decomposition models in predicting informed trades, we believe that the research conducted in our paper is an important contribution to the market microstructure literature.

Citation

Gregoriou, A., & Rhodes, M. (2017). The accuracy of spread decomposition models in capturing informed trades: Evidence from the London Stock Exchange and behavioural implications. Review of Behavioural Finance, 9(1), 2-13. doi:10.1108/rbf-02-2017-0016

Journal Article Type Article
Acceptance Date Feb 6, 2017
Online Publication Date Mar 28, 2017
Publication Date Apr 10, 2017
Deposit Date Feb 6, 2017
Publicly Available Date Mar 28, 2017
Journal Review of behavioral finance
Print ISSN 1940-5979
Electronic ISSN 1940-5987
Publisher Emerald
Peer Reviewed Peer Reviewed
Volume 9
Issue 1
Pages 2-13
DOI https://doi.org/10.1108/rbf-02-2017-0016
Keywords Spread decomposition models, Information asymmetry, Bid-ask spread, Time series modelling, Behavioural finance
Public URL https://hull-repository.worktribe.com/output/447846
Publisher URL http://www.emeraldinsight.com/doi/abs/10.1108/RBF-02-2017-0016
Additional Information This is the author's accepted manuscript of an article published in: Review of behavioral finance, 2017, v.9, issue 1.

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