Searching out of Trading Noise: A Study of Intraday Transactions Cost

摘要

We attempt to identify in this paper the role of trading noise as a transactions cost to market participant in the sense of Stoll (2000), especially in the presence of trading concentration. Applying the measures of Hu (2006) and Kang and Yeo (2008), we analyze the noise proportion in intraday stock returns and its interaction with investor herding and search cost. Although this noise is high on individual orders and low on institutional orders, its behavior at market open is entirely different from the rest of the day. Noises for small cap stocks, unlike volatilities, are lower than those for large cap stocks. We also found that noise relates positively to trading volume, but inversely to holdings and turnover ratio of institutional investors. Responses from institutional and individuals are quite the opposite. The noise proportion generated by individual order rises with institutional turnover and search cost encountered, while that of institutional order behaves just oppositely. At market open, behaviors of noise from institutional and individual orders just switch mutually, and then switch back afterwards. Also, noise from high-cap stocks is actually more responsive than that from low-cap ones across investors. So trading noise is a specific transactions cost, prominent to only certain investors, at certain time and for certain stocks in the market, rather than a general market friction as argued in Stoll (2000). This transactions cost is inversely related to search costs encountered in trading, which depends on investor, trading hour of day and market capitalization of stocks.