Asymmetry in the Permanent Price Impact of Block Purchases and Sales: Theory and Empirical Evidence

• Author: Vito Mollica,Zeyang Zhou,Maria Grazia Romano,Alex Frino
• Published date: 01 April 2017
• Date: 01 April 2017
• DOI: http://doi.org/10.1002/fut.21822

Asymmetry in the Permanent Price

Impact of Block Purchases and Sales:

Theory and Empirical Evidence

Alex Frino, Vito Mollica,* Maria Grazia Romano, and Zeyang Zhou

Previousresearch has identified that the information effectsof buyer-initiated trades are greater

than seller-initiated trades. We develop a theoretical model that predicts block purchases are

relatively more informed in bear markets and block sales are relatively more informed in bull

markets.Using a sample of large trades executedin the E-mini S&P 500 index futures and SPDR

S&P 500 exchange traded fund, we find evidence consistent with our theoretical model. Our

results are robustto volatility and macro-economic news announcementscategorized as bullish

or bearish. © 2016 WileyPeriodicals, Inc. Jrl Fut Mark 37:359–373, 2017

1. INTRODUCTION

A large body of research has examined the impact of block trades in equities markets (Chan &

Lakonishok, 1993, 1995, 1997; Chiyachantana, Jain, Jiang, & Wood, 2004; Holthausen,

Leftwich, & Mayers, 1987, 1990), derivative markets (Ahn, Kang, & Ryu, 2010; Berkman,

Brailsford, & Frino, 2005; Frino & Oetomo, 2005; Pan & Poteshman, 2006; Ryu, 2013), and

fixed-income markets (Bessembinder, Maxwell, & Venkataraman, 2006; Edwards, Harris,

& Piwowar, 2007). Three hypotheses have been developed that predict the price effects

associated with block trades: (1) short-run liquidity costs, (2) information asymmetry, and

(3) imperfect substitution (Kraus & Stoll, 1972; Scholes, 1972) measured by temporary,

permanent, and total impacts that block trades have on prices, respectively. Of particular

relevance to this article, is the information or permanent price effect associated with block

trades. Specifically, the finding reported in existing literature that documents the permanent

price effect of block purchases is greater than that measured for block sales. In this article, we

build a theoretical model of the price impact asymmetry of block trades in bull and bear

markets and test the predictions of the model using trade and quote data in futures markets

and exchange-traded funds (ETF).

Chiyachantana et al. (2004) suggest that liquidity available to purchasers is higher in

bearish markets, whereas in bullish markets, the available liquidity is higher for sellers. They

Alex Frino is at the University of Wollongong, Wollongong, New South Wales, Australia. Vito Mollica and

Zeyang Zhou are at the Macquarie University, Macquarie Park, New South Wales, Australia. Maria Grazia

Romano is at the Universita’di Salerno, Salerno, Italy. We would like to thank Sili Zhou as well as participants

at the 2016 China Derivatives Markets Conference, and participants of finance seminars at the Macquarie

Graduate School of Management, the University of Wollongong, and the Capital Markets CRC for their

useful comments. We especially thank the Securities Industry Research Centre of Asia Pacific for data and

technical support. Any errors or omissions are the responsibility of the authors alone.

*Correspondence author, Macquarie Graduate School of Management, NSW 2113, Australia. Tel: þ61-2-9850-

9097, Fax: þ61-2-9850-9019, e-mail: vito.mollica@mgsm.edu.au

Received September 2016; Accepted September 2016

The Journal of Futures Markets, Vol. 37, No. 4, 359–373 (2017)

© 2016 Wiley Periodicals, Inc.

Published online 9 November 2016 in Wiley Online Library (wileyonlinelibrary.com).

DOI: 10.1002/fut.21822