Market Microstructure and Stock Return Predictions

To what extent are the empirical regularities implied by market microstructure theories useful in predicting the short-run behavior of stock returns? A two-equation econometric model of quote revisions and transaction returns is developed and used to identify the relative importance of different mic...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 1994-04, Vol.7 (1), p.179-213
Main Authors: Huang, Roger D., Stoll, Hans R.
Format: Article
Language:English
Subjects:
Bids
Coefficients
Costs
Datasets
Econometrics
Expected values
Forecasting models
Futures
Inventory
Market forecasts
Market prices
Market structure
Modeling
Order processing
Price quotations
Sales
Stock exchange
Stock exchanges
Stock market indices
Stock prices
Stock returns
Trade
Trade finance
Trade volume
Variables
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:To what extent are the empirical regularities implied by market microstructure theories useful in predicting the short-run behavior of stock returns? A two-equation econometric model of quote revisions and transaction returns is developed and used to identify the relative importance of different microstructure theories and to make predictions. Microstructure variables and lagged stock index futures returns have in-sample and out-of-sample predictive power based on data observed at five-minute intervals. The most striking microstructure implication of the model, confirmed by the empirical results, specifies that the expected quote return is positively related to the deviation between the transaction price and the quote midpoint while the expected transaction return is negatively related to the same variable.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/7.1.179