Time and the Process of Security Price Adjustment.

This paper delineates the link between the existence of information, the timing of trades, and the stochastic process of prices. The authors show that time affects prices, with the time between trades affecting spreads. Because the absence of trades is correlated with volume, the authors' model predicts a testable relation between spreads and normal and unexpected volume, and demonstrates how volume affects the speed of price adjustment. Their model also demonstrates how the transaction price series will be a biased representation of the true price process, with the variance being both overstated and heteroskedastic. Copyright 1992 by American Finance Association.