Modelling non-linear behaviour of block price deviations when trades are executed outside the bid-ask quotes

Research output: Contribution to journalArticle

Abstract

Purpose – The purpose of this paper is to test and model non-linearities in block price deviations when they are executed outside the bid-ask quotes. The author conducts an empirical analysis on 662,312 transactions that were traded outside the bid-ask quotes in 2014 on the London Stock Exchange. Design/methodology/approach – The tests reject the linearity hypothesis and the paper shows that the exponential smooth transition autoregressive model is capable of capturing the non-linear behaviour of block price misalignments. Findings – The findings imply that when the deviation of block prices from their quoted value is small (large), trading will occur slowly (rapidly) to restore equilibrium, suggesting that trading costs eliminate continuous trading and that the block trade market is efficient. Originality/value – The purpose of this paper is to re-model block price deviations from the bid-ask quotes. The major contribution is that the paper presents new empirical evidence, which explicitly allows for the possibility that block price misalignments from the bid-ask quotes can be characterized by a non-linear mean reverting process. The author demonstrates that the presence of transaction costs induces non-linear adjustments of block trade prices.
Original languageEnglish
Pages (from-to)206-213
Number of pages8
JournalJournal of Economic Studies
Volume44
Issue number2
DOIs
Publication statusPublished - 24 Apr 2017

Fingerprint

Nonlinear modeling
Deviation
Bid
Misalignment
Block trades
Mean-reverting process
Smooth transition
Transaction costs
Design methodology
Linearity
London Stock Exchange
Empirical evidence
Nonlinearity
Nonlinear adjustment
Empirical analysis
Trading costs
Autoregressive model

Keywords

  • Bid-ask quotes
  • Block prices
  • STAR models
  • G10
  • C22

Cite this

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title = "Modelling non-linear behaviour of block price deviations when trades are executed outside the bid-ask quotes",
abstract = "Purpose – The purpose of this paper is to test and model non-linearities in block price deviations when they are executed outside the bid-ask quotes. The author conducts an empirical analysis on 662,312 transactions that were traded outside the bid-ask quotes in 2014 on the London Stock Exchange. Design/methodology/approach – The tests reject the linearity hypothesis and the paper shows that the exponential smooth transition autoregressive model is capable of capturing the non-linear behaviour of block price misalignments. Findings – The findings imply that when the deviation of block prices from their quoted value is small (large), trading will occur slowly (rapidly) to restore equilibrium, suggesting that trading costs eliminate continuous trading and that the block trade market is efficient. Originality/value – The purpose of this paper is to re-model block price deviations from the bid-ask quotes. The major contribution is that the paper presents new empirical evidence, which explicitly allows for the possibility that block price misalignments from the bid-ask quotes can be characterized by a non-linear mean reverting process. The author demonstrates that the presence of transaction costs induces non-linear adjustments of block trade prices.",
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Modelling non-linear behaviour of block price deviations when trades are executed outside the bid-ask quotes. / Gregoriou, Andros.

In: Journal of Economic Studies, Vol. 44, No. 2, 24.04.2017, p. 206-213.

Research output: Contribution to journalArticle

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AB - Purpose – The purpose of this paper is to test and model non-linearities in block price deviations when they are executed outside the bid-ask quotes. The author conducts an empirical analysis on 662,312 transactions that were traded outside the bid-ask quotes in 2014 on the London Stock Exchange. Design/methodology/approach – The tests reject the linearity hypothesis and the paper shows that the exponential smooth transition autoregressive model is capable of capturing the non-linear behaviour of block price misalignments. Findings – The findings imply that when the deviation of block prices from their quoted value is small (large), trading will occur slowly (rapidly) to restore equilibrium, suggesting that trading costs eliminate continuous trading and that the block trade market is efficient. Originality/value – The purpose of this paper is to re-model block price deviations from the bid-ask quotes. The major contribution is that the paper presents new empirical evidence, which explicitly allows for the possibility that block price misalignments from the bid-ask quotes can be characterized by a non-linear mean reverting process. The author demonstrates that the presence of transaction costs induces non-linear adjustments of block trade prices.

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