The asymmetry of the price impact of block trades and the bid‐ask spread Evidence from the London Stock Exchange

The asymmetry of the price impact of block trades and the bid‐ask spread Evidence from the... Purpose – This paper aims to examine the price impact of block trades for FTSE 100 firms. Design/methodology/approach – Using event studies a sample of 1.6 million block purchases and 1.2 million block sales over the time period 1998‐2005 is analysed. Findings – Once block price effects are estimated using quote returns to eliminate bid‐ask bias, the asymmetry in buyer and seller initiated trades is eliminated. Research limitations/implications – A possible avenue for future research may be to look at the impact of inflation on the asymmetry between block purchases and sales. This may be an interesting extension to the current study given that inflation appears to be an important determinant of the equity premium in international stock markets. Practical implications – The empirical results suggest that market liquidity is one of the factors that is driving the asymmetry between block purchases and sales on the London Stock Exchange. The paper is of interest to academics and practitioners who study and invest in block trades. Originality/value – This is the first study of the UK stock market to encapsulate bid‐ask biases in block trades. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

The asymmetry of the price impact of block trades and the bid‐ask spread Evidence from the London Stock Exchange

Journal of Economic Studies, Volume 35 (2): 9 – May 16, 2008

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0144-3585
DOI
10.1108/01443580810870164
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to examine the price impact of block trades for FTSE 100 firms. Design/methodology/approach – Using event studies a sample of 1.6 million block purchases and 1.2 million block sales over the time period 1998‐2005 is analysed. Findings – Once block price effects are estimated using quote returns to eliminate bid‐ask bias, the asymmetry in buyer and seller initiated trades is eliminated. Research limitations/implications – A possible avenue for future research may be to look at the impact of inflation on the asymmetry between block purchases and sales. This may be an interesting extension to the current study given that inflation appears to be an important determinant of the equity premium in international stock markets. Practical implications – The empirical results suggest that market liquidity is one of the factors that is driving the asymmetry between block purchases and sales on the London Stock Exchange. The paper is of interest to academics and practitioners who study and invest in block trades. Originality/value – This is the first study of the UK stock market to encapsulate bid‐ask biases in block trades.

Journal

Journal of Economic StudiesEmerald Publishing

Published: May 16, 2008

Keywords: Stock exchanges; Stocks; Bid offer spreads

References

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