Why do security prices change? A transaction-level analysis of NYSE stocks

This article develops and tests a structural model of intraday price formation that embodies public information shocks and microstructure effects. We use the model to analyze intraday patterns in bid-ask spreads, price volatility, transaction costs, and return and quote auto-correlations, and to construct metrics for price discovery and effective trading costs. Information asymmetry and uncertainty over fundamentals decrease over the day, although transaction costs increase The results help explain the U-shaped pattern in intraday bid-ask, spreads and volatility, and are also consistent with the intraday decline in the variance of ask price changes.