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Detecting Unobserved Heterogeneity in Efficient Prices via Classifier-Lasso
- Source :
- Journal of Business & Economic Statistics. 41:509-522
- Publication Year :
- 2022
- Publisher :
- Informa UK Limited, 2022.
-
Abstract
- This article proposes a new measure of efficient price as a weighted average of bid and ask prices, where the weights are constructed from the bid-ask long-run relationships in a panel error-correction model (ECM). To allow for heterogeneity in the long-run relationships, we consider a panel ECM with latent group structures so that all the stocks within a group share the same long-run relationship and do not otherwise. We extend the Classifier-Lasso method to the ECM to simultaneously identify the individual’s group membership and estimate the group-specific long-run relationship. We establish the uniform classification consistency and good asymptotic properties of the post-Lasso estimators under some regularity conditions. Empirically, we find that more than 30% of the Standard & Poor’s (S&P) 1500 stocks have estimated efficient prices significantly deviating from the midpoint—a conventional measure of efficient price. Such deviations explored from our data-driven method can provide dynamic information on the extent and direction of informed trading activities.
Details
- ISSN :
- 15372707 and 07350015
- Volume :
- 41
- Database :
- OpenAIRE
- Journal :
- Journal of Business & Economic Statistics
- Accession number :
- edsair.doi.dedup.....017a53f0a373e51187795e2a58df3d07