The determinants of the price impact of block trades: further evidence

Abstract

This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid-ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid-ask spreads are positively related to price impact. The bid-ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.Large or 'block' transactions play a major role in trading on stock exchanges worldwide. Nearly half of the trades on the NYSE are made in blocks of 10,000 shares or more. Jain (2003) claims that institutional activity, which is predominantly made up of block transactions, accounts for over 70 per cent of all trading activity. The significant quantity of block trades has led to substantial research in the area. Most examines the price impact of block trades, where price impact is measured by comparing the transaction price to an unperturbed price that would have prevailed if the trade were not executed. 1 The causes of price impact are also addressed in the literature. In particular, this has centred on explaining the magnitude and variation in price impact.

Liquidity Cost Determinants in the Saudi Market

“…The time dummies coefficients for all types of spreads quoted, relative and effective report similar patterns of a positive coefficients for time dummy1 at 0.2, 0.0004, and 0.015 ,respectively, then followed be negative signs reported in the same order for timedummy2 at (-0.03),(-0.0005) and(-0.034). Our time of the day results are consistent with Frino et al(2007) who find liquidity cost or price impact is the largest for of block trades executed at the first hour. Moreover, our intraday spread pattern is somehow similar to Al-Suhaibani and Kryzanowski (2000) who find that spreads are at their highest at the open and narrow over the trading day in the SSM.…”

“…Volatility shows positive coefficient for the buy block trades and negative for sell trades which confirm the greater price impact that is attributed to higher risk and dispersion of beliefs among traders. The volatility coefficients are consistent with prior research (e.g., Chan and Lakonishok, 1997; Chiyachantana et al, 2004;Frino et al, 2007) Turnover has negative relationship to price impact for the buy blocks, indicating that increased liquidity in the market reduces the price impact of the block trade. Our results confirm prior market research that turnover as a measure of liquidity should have negative relationship with the price impact.…”

“…When spread is wider the price impact is greater for both buy and sell block trades. Our BAS coefficients are consistent with Gemmil(1996) and Frino et al(2007).…”

Price impact of block trades: the curious case of downstairs trading in the EU emissions futures market

“…This implies that the market has learnt something new about the instrument, which leads to a new price equilibrium. In this study, we follow Mayers (1990), Gemmill (1996), Frino, Jarnecic, and Lepone (2007) and Alzahrani, Gregoriou, and Hudson (2013) …”

The accuracy of spread decomposition models in capturing informed trades

“…Finally, given that Alzahrani, Gregoriou, and Hudson (2013) and Frino, Jarnecic, and Lepone (2007) report intraday effects for block trades for consistency, we introduce trading hour, day of week and month of year dummy variables in equations (5) and (7) in order to capture trading time/period effects. The results which can be seen in Table 3 …”