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The determinants of the price impact of block trades: further evidence
Author(s) -
Frino Alex,
Jarnecic Elvis,
Lepone Andrew
Publication year - 2007
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/j.1467-6281.2007.00219.x
Subject(s) - explanatory power , market liquidity , economics , ask price , econometrics , bid price , financial economics , stock (firearms) , stock price , mid price , stock exchange , market maker , price level , monetary economics , stock market , finance , mechanical engineering , paleontology , philosophy , epistemology , series (stratigraphy) , biology , engineering , horse
This article extends previous literature which examines the determinants of the price impact of block trades on the Australian Stock Exchange. As previous literature suggests that liquidity exhibits intraday patterns, we introduce time of day dummy variables to explore time dependencies in price impact. Following theoretical developments in previous literature, the explanatory power of the bid–ask spread, a lagged cumulative stock return variable and a refined measure of market returns are also examined. The model estimated explains approximately 29 per cent of the variation in price impact. Block trades executed in the first hour of trading experience the greatest price impact, while market conditions, lagged stock returns and bid–ask spreads are positively related to price impact. The bid–ask spread provides most of the explanatory power. This suggests that liquidity is the main driver of price impact.