Skip to main content
SpringerLink
Log in

The Inter-Temporal Behavior of Informed and Uninformed Traders

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

The purpose of this study is to investigate the inter-temporal trading behavior of informed and uninformed investors. We estimate a variation of the market microstructure model developed in Easley, Keifer, O'Hara, and Paperman (1996) and document the day-of-the-week pattern in informed and uninformed trading, as well as the probability of an information event and the probability of bad news. Using bootstrapped distributions, we show that the probability of trading against informed investors follows a U-shape pattern from Monday to Friday. Cross-sectional regression results suggest that inter-temporal patterns between informed and uninformed traders can generate observed patterns in liquidity provision costs.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

  • Amihud, Y. and H. Mendelson, “Asset Pricing and the Bid-Ask spread. ” Journal of Financial Economics 17, 223–249 (1986).

    Google Scholar 

  • Ariel, R. A. “A Monthly Effect in Stock Returns. ” Journal of Financial Economics 17, 161–174 (1987).

    Google Scholar 

  • Benston, G. and R. Hagerman, “Determinants of Bid-Ask Spreads in the Over-the-Counter Market.” Journal of Financial Economics 1, 353–364 (1974).

    Google Scholar 

  • Brennan, M. J. and A. Subrahmanyam, “Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns. ” Journal of Financial Economics 41, 441–464 (1996).

    Google Scholar 

  • Brockman, P. and D. Y. Chung, “Inter-and Intra-Day Liquidity Patterns on the Stock Exchange of Hong Kong. ” Journal of International Financial Markets, Institutions & Money 8, 279–300 (1998).

    Google Scholar 

  • Brockman, P. and D. Y. Chung, “Informed and Uninformed Trading in an Electronic, Order-Driven Environment. ” Financial Review 35, 125–146 (2000a).

    Google Scholar 

  • Brockman, P. and D. Y. Chung, “An Empirical Investigation of Trading on Asymmetric Information and Heterogeneous Prior Beliefs. ” Journal of Empirical Finance 7, 417–454 (2000b).

    Google Scholar 

  • Brown, P., N. Thompson and D. Walsh, “Characteristics of the Order Flow Through an Electronic Open Limit Order Book. ” Journal of International Financial Markets, Institutions & Money 9, 335–357 (1999).

    Google Scholar 

  • Chalmers, J. M. R. and G. B. Kadlec, “An Empirical Examination of the Amortized Spread. ” Journal of Financial Economics 48, 159–188 (1998).

    Google Scholar 

  • Datar, V. T., N. Y. Naik and R. Radcliffe, “Liquidity and Stock Returns: An Alternative Test. ” Journal of Financial Markets 1, 203–219 (1998).

    Google Scholar 

  • Easley, D., N. Keifer, M. O'Hara and J. Paperman, “Liquidity, Information, and Infrequently Traded Stocks. ” Journal of Finance 51, 1405–1436 (1996).

    Google Scholar 

  • Easley, D., N. Keifer and M. O'Hara, “One Day in the Life of a Very Common Stock. ” Review of Financial Studies 10, 805–835 (1997a).

    Google Scholar 

  • Easley, D., N. Keifer and M. O'Hara, “The Information Content of the Trading Process. ” Journal of Empirical Finance 4, 159–186 (1997b).

    Google Scholar 

  • Easley, D., O'Hara and J. Paperman, “Financial Analysts and Information-Based Trade. ” Journal of Financial Markets 1, 175–201 (1998).

    Google Scholar 

  • Easley, D., O'Hara and P. S. Srinivas, “Option Volume and Stock Prices: Evidence on Where Informed Traders Trade. ” Journal of Finance 53, 431–465 (1998).

    Google Scholar 

  • French, K. R., “Stock Returns and the Weekend Effect. ” Journal of Financial Economics 8, 55–70 (1980).

    Google Scholar 

  • Hansen, L. P., “Large Sample Properties of Generalized Method of Moments Estimators. ” Econometrica 50, 1029–1054 (1982).

    Google Scholar 

  • Harris, L., “A Transaction Data Study of Weekly and Intradaily Patterns in Stock Returns. ” Journal of Financial Economics 16, 99–117 (1986).

    Google Scholar 

  • Lakonishok, J. and S. Smidt, “Are Seasonal Anomalies Real? A Ninety-Year Perspective. ” Review of Financial Studies 1, 403–425 (1988).

    Google Scholar 

  • Newey, W. and K. West, “A Simple Positive Semi-Definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix. ” Econometrica 55, 703–708 (1987).

    Google Scholar 

  • Rozeff, M. S. and W. R. Kinney, Jr., “Capital Market Seasonality: The Case of Stock Returns. ” Journal of Financial Economics 3, 379–402 (1976).

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Hong Kong Polytechnic University, Hung Hom, Hong Kong

    Paul Brockman (Associate Professor of Finance)

  2. Hong Kong Polytechnic University, Hung Hom, Hong Kong

    Dennis Y. Chung (Associate Professor of Accounting)

Authors
  1. Paul Brockman
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Dennis Y. Chung
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dennis Y. Chung.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Brockman, P., Chung, D.Y. The Inter-Temporal Behavior of Informed and Uninformed Traders. Review of Quantitative Finance and Accounting 21, 251–265 (2003). https://doi.org/10.1023/A:1027336414897

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1027336414897

Search

Navigation