Seminar Vol. 196

Title: Beat the Midpoint: Heterogeneity in Bid-Ask Long-Run Equilibrium

Speaker: Wenxin Huang, Shanghai Jiao Tong University

Time: November 12th, 2019  13:30-15:00

Venue: Conference Room 106B, IESR, Zhonghui Building (College of Economics)

About the speaker:

Dr. Wenxin Huang is an Assistant Professor at Antai College of Economics & Management, Shanghai Jiao Tong University. She obtained her Ph.D. in economics from Singapore Management University in 2018. Her research interests include econometric theory and financial econometrics, especially in nonstationary panels, unobserved heterogeneity, and factor models.

Abstract:

The bid-ask midpoint is frequently used as a benchmark of efficient price, but few work exams its accuracy. Based on permanent-transitory decomposition, we propose a new measure of efficient price—a weighted average of the bid and ask quotes with heterogeneous weights constructed from bid-ask long-run relationships. By using a novel Classifier-LASSO (C-LASSO) method, we find that more than 30% of S&P 1500 stocks efficient price significantly deviate from the bid-ask midpoint. Although the C-LASSO uses statistical rule rather than economic intuition, our new measure of efficient price is nevertheless associated with economically meaningful events: (1) the stocks exposing more to information asymmetry risk whose efficient prices are more likely to deviate from midpoints; (2) The deviation is in the same direction of informed trading before earnings announcements.