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A Direct Test of Methods for Inferring Trade Direction from Intra-Day Data

Published online by Cambridge University Press:  06 April 2009

Thomas J. Finucane
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Abstract

This study directly tests the ability of several competing methods to identify market buy and sell orders using intra-day quote and trade prices, and identifies factors that affect the accuracy of the methods. Lee and Ready's (1991) algorithm performs about the same as the tick test, but the performance of both methods is worse than expected. The results show that the use of either algorithm to classify trades can lead to significantly biased estimates of effective spreads and signed volume, but the tick test provides better estimates of effective spreads and signed volume than Lee and Ready's method.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 4 , December 2000 , pp. 553 - 576
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Syracuse University, School of Management, Syracuse, New York, NY 13244. The author is grateful to Paul Malastesta (the editor) and Hank Bessembinder (associate editor and referee) for help-ful comments and valuable suggestions. Funding was provided by the Office of the Vice President for Research and Computing and the Entrepreneurship and Emerging Enterprises Center at Syracuse University.

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