A Test of the Accuracy of the Lee / Ready Trade Classification Algorithm
نویسنده
چکیده
We analyze the accuracy of the Lee / Ready (1991) trade classification algorithm and the simpler tick test. Our definition of true trade classification is based on whether the Makler (the equivalent of the specialist on the Frankfurt Stock Exchange) bought or sold shares. The Lee / Ready method classifies only 72.8% of the transactions correctly. The simpler tick test performs almost equally well. We document that misclassification of trades may systematically bias the results of empirical microstructure research. Finally, we show that estimation of the bid-ask spread from transactions data results in a reasonably accurate estimate of the relative liquidity of our sample stocks. This is an important finding because quote data for the German stock market is not available on a regular basis. JEL classification: G10
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