The author systematically examines one of the important issues of information — establishing the market price. He introduces the concept of «search» — where a buyer wanting to get a better price, is forced to question sellers. The article deals with various aspects of finding the necessary information.

Economics of Information

In this article we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sampleperiod (1962-1985) and for all subperiods for a variety of aggregate returns indexes and size-sorted porfolios. Although the rejections are due largely to the behavior of small stocks, they cannot be attributed completely to the effects of infrequent trading or timevarying volatilities. Moreover, the rejection of the random walk for weekly returns does not support a mean-reverting model of assetprices.

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Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

In this paper, we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962-1985) and for all sub-periods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are largely due to the behavior of small stocks, they cannot be ascribed to either the effects of infrequent trading or time-varying volatilities. Moreover, the rejection of the random walk cannot be interpreted as supporting a mean-reverting stationary model of asset prices, but is more consistent with a specific nonstationary alternative hypothesis.

Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test

This paper reviews previous and current research on the relation between price changes and trading volume in financial markets, and makes four contributions. First, two empirical relations are established: volume is positively related to the magnitude of the price change and, in equity markets, to the price change per se. Second, previous theoretical research on the price-volume relation is summarized and critiqued, and major insights are emphasized. Third, a simple model of the price-volume relation is proposed that is consistent with several seemingly unrelated or contradictory observations. And fourth, several directions for future research are identified.

https://www.jstor.org/stable/pdfplus/2330874.pdf

The Relation between Price Changes and Trading Volume: A Survey

An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from liquidity-motivated traders and expected losses to informationmotivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information-motivated trader, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid-ask spread proposed in this paper is consistent with the empirical literature. THIS PAPER IS CONCERNED with the determination of bid-ask spreads in organized financial markets, where the trading is done through economic agents who specialize in market-making for a limited set of securities. The commitment made by dealers to buy or sell at the bid and ask prices, respectively, is analyzed as a combination of put and call options, and empirical results published in previous works are shown to be consistent with the model. While there have been several papers concerned with the bid-ask spread, no entirely satisfactory theory has yet emerged. Demsetz [10] was the first to formalize the problem. He treated the bid-ask spread as a (transaction) cost to the trader for immediacy, and analyzed it in a static supply and demand framework.

https://www.jstor.org/stable/pdfplus/2327580.pdf

Information Effects on the Bid‐Ask Spread

By considering investor order placement strategy, this paper demonstrates that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets. With transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote; thus, with certainty of execution at the counterpart market quote, a "gravitational pull" is generated that keeps counterpart quotes from being placed infinitesimally close to each other. An equilibrium spread is defined and its size linked to market thinness; implications are noted for the design of a trading system.

https://www.jstor.org/stable/pdfplus/1833312.pdf

Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread

Friction in the trading process and the estimation of systematic risk

The Microstructure of Securities Markets.

This paper examines the implications of microstructure theory for empirical research on stock price behavior

Implications of microstructure theory for empirical research in stock price behavior

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Kalman J. Cohen

Papers

Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread

Friction in the trading process and the estimation of systematic risk

The Microstructure of Securities Markets.

Implications of microstructure theory for empirical research in stock price behavior

Implications of Microstructure Theory for Empirical Research on Stock Price Behavior