|
|
|
|
||||
|
||||
Liquidity Dynamics and Cross-AutocorrelationsTarun ChordiaEmory University - Department of Finance Asani SarkarFederal Reserve Bank of New York Avanidhar SubrahmanyamUniversity of California, Los Angeles (UCLA) - Finance Area January 27, 2010 FRB of New York Staff Report No. 303 Abstract: This paper examines the mechanism by which the incorporation of information into prices leads to cross-autocorrelations in stock returns. We present a simple model where trading on private information occurs first in the large stocks and is transmitted to small stocks with a lag. Such trading impacts large stock liquidity, so that, in equilibrium, large stock illiquidity portends stronger cross-autocorrelations. Empirically, we find that the lead-lag relation between large and small stocks increases with lagged illiquidity indicators of large stocks. Further, order flows in large stocks significantly predict returns of small stocks when large stock spreads are high, at both the market and industry levels. In addition, the role of order flow and liquidity in predicting small stock returns is stronger prior to macro announcements (when information-based trading is more likely).
Number of Pages in PDF File: 50 Keywords: lead-lag, returns, small stocks, large stocks, microstructure, information JEL Classification: G10, G14 working papers seriesDate posted: September 24, 2007 ; Last revised: February 18, 2011Suggested CitationContact Information
|
|
|||||||||||||||||||||||||||||||
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
FAQ
Terms of Use
Privacy Policy
Copyright
This page was processed by apollo2 in 0.469 seconds
