Journal of Financial Services Research

, Volume 51, Issue 3, pp 385–436 | Cite as

Bid-Ask Spread, Quoted Depths, and Unexpected Duration Between Trades

Article
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Abstract

We examine the intraday informational and liquidity effects of unexpected duration between trades on bid-ask spreads and depths. The difference between realized duration and the predicted duration from an autoregressive conditional duration model is used as a proxy for unexpected duration. We find that unexpected short duration alone permanently increases the quoted spread and positively correlates with the adverse-selection component of the effective spread, despite the presence of a liquidity component in the spread adjustment. Unexpected duration for a buyer-initiated trade has a stronger impact on the quoted spread than that for a seller-initiated trade. These results support the implications of information uncertainty in Easley and O’Hara (J Financ 47(2):577–605 1992) and short-sales constraints in Diamond and Verrecchia (J Financ Econ 18:277–311 1987) for the price adjustment behavior. Moreover, we show that unexpected short duration for a seller-initiated (buyer-initiated) trade permanently increases (slightly reduces) the bid (ask) depth and that there is also a liquidity component in the adjustment in depths. We attribute the asymmetric effects on depths to the differential informativeness of buyer- and seller-initiated trades.

Keywords

Autoregressive conditional duration model Unexpected duration Bid-ask spread Quoted depths Information asymmetry Liquidity 

JEL Classification

G12 G14 
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Notes

Acknowledgments

We thank Kristian Rydqvist, Murali Jagannathan, Dennis Lasser, Srini Krishnamurthy, Jay Wellman, Xue Wang, Ming Liu, and Joshua Spizman at SUNY-Binghamton and seminar participants and discussants at the State Street Global Advisors (SSgA), and LYZ Capital Advisors LLC, 4th Financial Markets and Corporate Governance Conference (Wellington, New Zealand), 2013 Asian Finance Association Annual Conference (Nanchang, China), 2013 World Finance Conference & Banking Symposium (Beijing, China), and the 22nd Pacific-Basin Finance, Economics, Accounting, and Management Conference (Nagoya, Japan) for their helpful comments on early drafts of the paper. We are especially grateful for an anonymous referee’s very helpful comments and great encouragement for substantially revising the paper. All errors are our own.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Institute for Financial and Accounting StudiesXiamen UniversityXiamenChina
  2. 2.School of ManagementState University of New York at BinghamtonVestalUSA

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