Determinants of Price Quote Revisions on the London Stock Exchange

Posted: 25 Jul 1998

See all articles by Andy Snell

Andy Snell

University of Edinburgh - Economics

Ian Tonks

University of Bristol - Department of Finance and Accounting

Date Written: November 1994

Abstract

This paper investigates the determinants of price quote revisions on the London Stock Exchange for a sample of highly liquid stocks over a two week settlement period in September 1990. In our theoretical model the level of optimal price quotes set by market makers are a function of the expected fundamental price, the expected number of liquidity trades and the lagged level of inventories. The model is used to test for the existence of adverse selection, inventory control and anticipated liquidity trade effects on quote revisions. Our findings are that while there seems to be some evidence of asymmetric information in our sample, market makers clearly take into account their inventory positions in the stocks in which they make a market, but there is little evidence that market makers exploit liquidity traders.

JEL Classification: G19

Suggested Citation

Snell, Andy and Tonks, Ian, Determinants of Price Quote Revisions on the London Stock Exchange (November 1994 ). Available at SSRN: https://ssrn.com/abstract=6951

Andy Snell

University of Edinburgh - Economics ( email )

50 George Square
Edinburgh, EH8 9JY
United Kingdom

Ian Tonks (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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