The role of trading intensity estimating the implicit bid-ask spread and determining transitory effects

In this paper, we investigate the information content of trading intensity applying the Madhavan, Richardson and Roomans (1997) structural model to express trading intensity as trading momentum in duration and volume. Using both transactions and intraday data from the Helsinki Stock Exchange Limit Order Bookmarket, we find that momentum in duration and volume enhances the information effect. We reach this conclusion based on the parametric effect determined by the sign and the magnitude of the coefficients associated with the trading intensity variables, the trading effect determined by the ratio of transitory effects to permanent effects, and the economic effect determined by the size of the implicit bid-ask spread. While we find that the implicit bid-ask spread and transitory effects are decreasing toward the end of the trading day in consistency with information models in the literature, there is a surge of trades at the market close, most probably due to information uncertainty at market opening in New York. (C) 2011 Elsevier Inc. All rights reserved.