This thesis studies the intraday price behavior for stock trading in the Stock Exchange of Hong Kong (SEHK). We assume there are three types of traders in the market: informed traders who trade using their private information; nondiscretionary liquidity traders who trade for immediate liquidity needs; and discretionary liquidity traders supplying liquidity by placing limit orders. Changes in transaction prices are caused by private information revealed from order flow and price concessions demanded by liquidity providers in supplying inventories. The empirical model is tested using transactions data for the year 1995. The ordered probit estimation results from 100 sample stocks show that the intraday price movement is affected by costs of adverse selection and inventory holding, with th...[ Read more ]

This thesis studies the intraday price behavior for stock trading in the Stock Exchange of Hong Kong (SEHK). We assume there are three types of traders in the market: informed traders who trade using their private information; nondiscretionary liquidity traders who trade for immediate liquidity needs; and discretionary liquidity traders supplying liquidity by placing limit orders. Changes in transaction prices are caused by private information revealed from order flow and price concessions demanded by liquidity providers in supplying inventories. The empirical model is tested using transactions data for the year 1995. The ordered probit estimation results from 100 sample stocks show that the intraday price movement is affected by costs of adverse selection and inventory holding, with the former effect being more important than the latter. We run further cross-sectional regressions to analyze the determinants of the price impact. Our findings suggest that stocks which have larger market capitalization, higher trading velocity and more trading noise give a deeper market. While high price stocks experience a smaller percentage price impact from trade, the relationship between trading price and market depth in ticks is inconclusive due to the sliding scale in the spread table of the SEHK. For the intraday behavior in adverse selection cost, we discover a U-shaped pattern in price impact from order flow, suggesting traders are more cautious about trading when the market has just opened or approaches the end of the trading day. Lastly, there is evidence that traders may reduce their cost from trading by splitting orders so as to dampen the pressure on inventory holding. Overall, the empirical results agree with the prediction put forward by the theoretical market microstructure literature.