Bid–ask bounce and the measurement of price behavior around block trades on the Australian Stock Exchange

Abstract

This paper analyses the price behavior surrounding block transactions on the Australian Stock Exchange. Previous research documents a price reversal following block sales and a price continuation following block purchases—an ‘asymmetry’ in the price reaction to sales and purchases. This paper reports the results of research which examines whether this asymmetry results from measurement error caused by bid–ask effects. The asymmetry reported in previous literature is first re-documented in this study, using returns based on trade prices. When this analysis is repeated using returns calculated from bid–ask quotes which are purged of bid–ask effects, price continuations follow both purchases and sales. This is consistent with the proposition that the asymmetry in the direction of price behavior following block trades is driven by bid–ask effects.