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Journal of Empirical Finance

Volume 4, Issues 2–3, June 1997, Pages 159-186

The information content of the trading process ☆

David Easley a, Nicholas M. Kiefer a, Maureen O'Hara b

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Abstract
The trade process is a stochastic process of transactions interspersed with periods of inactivity.
The realizations of this process are a source of information to market participants. They cause
prices to move as they affect the market maker's beliefs about the value of the stock. We fit a
model of the trade process that allows us to ask whether trade size is important, in that large and
small trades may have different information content (they do, but this varies across stocks);
whether uninformed trade is i.i.d. (it is not); and, whether large buys and large sells are equally
informative (they differ only marginally). The model is fitted by maximum likelihood using
transactions data on six stocks over 60 days.

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JEL classification
C12; C51; G20; G14

Keywords
Market microstructure; Model estimation

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☆
We thank Richard Lyons and participants at the High Frequency Data in Finance conference for helpful comments,
and Joseph Paperman and Fan Xu for programming assistance. We also thank three anonymous referees and the
editor of this journal, Richard Baille, for many helpful suggestions. This research is supported by National Science
Foundation Grant SBR93-20889.

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