Asymmetric Dynamics of Quoted Prices and Trades in the Informed Dissemination Process

Abstract

This article documents the asymmetric responses of bid and ask prices to informed trades by observing the information transmission process between the KOSPI 200 futures market and its underlying stock market, using the 10-second quote and trade data from July 2004 to February 2005. The vector error correction system analysis shows that the futures market tends to lead the stock market in terms of returns and order imbalances, even though the other direction is also weakly observable. More importantly, in the vector error correction system analysis with bid and ask returns, we observe that the lagged ask (bid) returns in one market have greater positive impact on contemporaneous bid (ask) returns in the other market. By categorizing the whole samples into two groups according to the KOSPI index daily returns, positive and negative, we figure out this asymmetric cross-market impact of ask and bid results from informed trades.