Abstract
The study analyses the price process in the BSE using the microstructure theory that acknowledges imperfect information in the stock market. The paper adopted the standard ACD model of Engle and Russell (1998). The data used in this paper has been sampled by a thinned point process. The model is applied to the actual prices of two stocks traded on the BSE and the evidence in favor of asymmetry information is strong. The study finds that uninformed traders prefer to trade when the market is liquid while informed traders trade only when they believe that they will gain. The assumption of perfect information is found to be unrealistic and preference is given to market microstructure theory. Following Easley and O’Hara (1992) information effects are also empirically relevant to analysis of price process in the stock markets.
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