PRICE IMPLICATIONS OF BLOCK
Date
2011-05-10
Authors
Kithinji, Kinya
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Abstract
The purpose of this research was to investigate the impact of block transactions on
security prices and on the price discovery process arising from such trades, with
emphasis on actively traded JSE-listed securities. The focus was on the stock market’s
reaction immediately before and after the block trade. First, the researcher investigated
whether, on average, block trades leads to excess returns and, secondly, whether the
resulting price impact is permanent or temporary.
The research differentiated between buyer- and seller-initiated block trades and
analysed these trades separately. The findings indicate that there are asymmetries
between the two types of trades, specifically with respect to the frequency of occurrence
and the pricing, with seller-initiated trades being more prominent in all aspects. The
prevailing market conditions seem to account for the price asymmetry between sellerand
buyer-initiated trades while the market trading structure explains the total price
impact.
Using well established statistical techniques, the key findings reveal that while block
trades have an impact on the prices of the underlying securities, the total impact is
predominately temporary as share prices revert back within one to three trades,
irrespective of the type of trade. Contrary to expectations, the block size does not have
an impact on the total price or on the speed of price re-adjustment. Further, if the market
has information about a pending block trade, there is insufficient evidence that they
react to such information prior to the execution of the block trade.
The research concludes that block trades do not lead to an adverse effect on security
prices of actively traded shares. This will be of interest to firms whose shares are prone
to being traded in blocks, equity traders, policy makers and regulators.
Description
MBA - WBS
Keywords
Share transactions, Johannesburg Securities Exchange