Market Predictability and Non-Informational Trading
University of California, Berkeley - Haas School of Business
Mark S. Seasholes
Hong Kong University of Science & Technology (HKUST)
March 11, 2009
This paper studies the ability of non-informational order imbalances (buy minus sell volume) to predict daily stock returns at the market level. Using a model with three types of participants (an informed trader, liquidity traders, and a finite number of arbitrageurs), we derive predictions relating returns to lagged returns and lagged order imbalances. Empirical tests using New York Stock Exchange non-informational basket/portfolio trading data provide results consistent with adverse selection at the market-level, but no evidence of limited risk-bearing capacity. Finally, we establish that these market-wide non-informational order imbalances also affect individual stock return comovement by examining additions to the S&P500 Index.
Number of Pages in PDF File: 37
Keywords: Return Predictability, Liquidity, Comovement
JEL Classification: D82, G10, G12working papers series
Date posted: November 21, 2008 ; Last revised: April 27, 2009
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