Rosenthal, Dale W.R. (2008): Modeling Trade Direction.
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The problem of classifying trades as buys or sells is examined. I propose estimated quotes for midpoint and bid/ask tests and a modeling approach to classification. Prevailing quotes are estimated using flexible approximations to the distribution for delays of quotes relative to trade timestamps. Classification is done by a generalized linear model which includes improved versions of midpoint, tick, and bid/ask tests. The model also considers the relative strengths of these tests, can account for market microstructure peculiarities, and allows for autocorrelations and cross-correlations in trade direction. The correlation modeling corrects for pseudoreplication, yielding more accurate standard errors and fixed effect estimates. Further, the model estimates probabilities of correct classification. The model is compared to various trade classification methods using a sample of 2,836 domestic US stocks from an unexplored, recent, and readily-available dataset. Out of sample, modeled classifications are 1-2% more accurate overall than current methods; this improvement is consistent across dates, sectors, and locations relative to the inside quote. For Nasdaq and NYSE stocks, 1% and 1.3% of the improvement comes from using relative strengths of the various tests; 0.9% and 0.7% of the improvement, respectively, comes from using some form of estimated quotes. For AMEX stocks, a 0.4% improvement is attributed to using a lagged version of the bid/ask test. I also find indications of short- and ultra-short-term alpha.
|Item Type:||MPRA Paper|
|Original Title:||Modeling Trade Direction|
|Keywords:||market microstructure; trade classification; generalized linear mixed model; ultra-high-frequency data analysis|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
|Depositing User:||Dale W.R. Rosenthal|
|Date Deposited:||28. Aug 2008 06:12|
|Last Modified:||13. Feb 2013 23:13|
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