One Day in the Life of a Very Common Stock (original) (raw)

Using the model structure of Easley and O'Hara (Journal of Finance, 47, 577-604), we demonstrate how the parameters of the market-maker's beliefs can be estimated from trade data. We show how to extract information from both trade and no-trade intervals, and how intraday and interday data provide information. We derive and evaluate tests of model specification and estimate the information content of differential trade sizes. Our work provides a framework for testing extant microstructure models, shows how to extract the information contained in the trading process, and demonstrates the empirical importance of asymmetric information models for asset prices. The theoretical market microstructure literature abounds with structural models of the market-maker's price-setting decision problem in securities markets. These models [Glosten and Milgrom (1985); Kyle