Time and the price impact of a trade

We use Hasbrouck's (1991) vector autoregressive model for prices and trades to empirically test and assess the role played by the waiting time between consecutive transactions in the process of price formation. We find that a s the time duration between transactions decreases, the price impact of tra des, the speed of price adjustment to trade-related information, and the po sitive autocorrelation of signed trades all increase. This suggests that ti mes when markets are most active are times when there is an increased prese nce of informed traders; we interpret such markets as having reduced liquid ity.