Abstract
In this paper I study the price formation process on the Stock Exchange of Hong Kong (SEHK). The estimation results reveal that the information effect is more important than the inventory effect in explaining the transaction price movement. The cross-sectional variation in market depth is positively related to the stocks’ market capitalization, turnover rate, trading price, and trading noise. The price impact displays a U-shaped pattern over the trading day, which is in contrast to the downward sloping pattern discovered on the NYSE. Such differences seem to be caused by the variation in average trade size between the two markets.
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