Intraday trade in dealership markets

Dan Bernhardt, Eric Hughson

Research output: Contribution to journalArticlepeer-review


We develop and test a structural asymmetric information transaction model to characterize the price impact of information when markets are thin. Since orders are accepted individually, the model allows for transaction costs and brokerage fees. Equilibrium demands mixed entry strategies on the part of potentially informed traders. Estimation of the structural parameters is performed using a maximum likelihood procedure on NYSE data. The structural model is rejected primarily because the nonlinear restrictions do not allow for sufficient correlation between price movements and pricing errors. This leads to unreasonably low estimates of the probability of informed trade relative to an unrestricted alternative. The price impact of information is found to be positive and significant, but economically small. This is because although the amount of private information is substantial, the quality of the information signals is poor, particularly in the middle of the trading day. Informed agents do not trade small quantities, which suggests that their ability to divide orders is limited by transaction costs.

Original languageEnglish (US)
Pages (from-to)1697-1732
Number of pages36
JournalEuropean Economic Review
Issue number9
StatePublished - Oct 2002


  • Market microstructure
  • Structural estimation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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