A0401
Title: Time and the price impact of trades in Australian banking stocks around interest rate announcements
Authors: Manh Cuong Pham - Lancaster University (United Kingdom) [presenting]
Heather Anderson - Monash University (Australia)
Huu Nhan Duong - Monash University (Australia)
Paul Lajbcygier - Monash University (Australia)
Abstract: A nonlinear vector-autoregressive framework for trade durations, trade attributes (signs and volumes) and returns is proposed which incorporates the dynamic interdependence amongst these variables and relaxes the exogeneity assumption that is often imposed on durations in previous studies. We employ this framework to examine the role of durations and trade attributes in the price formation process for Australian banking stocks around interest rate announcements. We find that durations are not only correlated but also jointly determined with trade characteristics and returns. Shorter durations increase the price impact and autocorrelation of trades. Transactions executed within one minute around the announcements have shorter durations and larger impact on prices. Without a duration shock, the cumulative price impact of an unexpected trade is similar, regardless of whether or not durations are endogenously modeled. However, conditioning on an average before-announcement history, the cumulative price impact is higher (lower) following a negative (positive) duration shock if durations are endogenous, yet it stays unchanged if durations are treated as exogenous. Duration shocks contribute significantly less to the forecast error variance of returns than trade attributes shocks. The contribution of duration shocks is larger on announcement days, when durations are endogenously modeled, and for less liquid stocks.
