Trading Intensity, Adverse Selection Cost and Informed Trading

We investigated the role of trading duration in measuring the price impact of trades based on MRR structure model. Using the data of 18 actively traded stocks over three months in 2004, we found that when trading duration decreases, the adverse selection cost increases, thus the price impact of trades increase, but no evidences show that there is effect of trading duration on liquidity cost. Further, we investigated their effects of the duration residue of WACD(1,1) model on adverse selection cost and liquidity cost respectively. Our results show that the effect of the residue on adverse selection cost is significant, while the duration residue does not affect liquidity cost. These suggest that when the intensity of informed trading increases, the adverse selection cost increases but the liquid cost does not.