THE ACCURACY OF THE TICK TEST - EVIDENCE FROM THE AUSTRALIAN STOCK-EXCHANGE

In the absence of information regarding whether a trade is buyer or se ller initiated, many researchers have employed the 'tick' rule as a pr oxy. These researchers have been supported in their endeavours by the work of Lee and Ready (1991) which suggests that the tick rule is 90% accurate. Unfortunately, the difficulty of securing data on this issue has made Lee and Ready's paper somewhat unique in that there have bee n few attempts to confirm their result in US markets and no attempts i n other markets. The purpose of this work is to test the robustness of their result in the Australian securities market. Using cleaner intra -day data we mimic the Lee and Ready study to cast some doubt upon the robustness of their findings in different markets. Our results sugges t an overall accuracy of approximately 74% as opposed to Lee and Ready 's 90%. However, accuracy in excess of 90% is documented when zero tic ks are excluded. Further analysis provides evidence that a volatile or trending market will decrease the accuracy of the tick rule. It is al so demonstrated that the tick rule is less likely to accurately classi fy seller initiated trades and small buyer initiated trades.