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A Direct Test of Methods for InferringTrade 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 severalcompeting methods to identify market buy and sellorders using intra-day quote and trade prices, andidentifies factors that affect the accuracy of themethods. Lee and Ready's (1991) algorithm performsabout the same as the tick test, but the performanceof both methods is worse than expected. The resultsshow that the use of either algorithm to classifytrades can lead to significantly biased estimates ofeffective spreads and signed volume, but the ticktest provides better estimates of effective spreadsand signed volume than Lee and Ready's method.

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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 isgrateful to Paul Malastesta (the editor) and HankBessembinder (associate editor and referee) forhelp-ful comments and valuable suggestions.Funding was provided by the Office of the VicePresident for Research and Computing and theEntrepreneurship and Emerging Enterprises Centerat Syracuse University.

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