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

Gregoriou, Andros; Rhodes, Mark

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. https://doi.org/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
• 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.
• Contract Date: Feb 6, 2017