Detecting Liquidity Traders
Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business
Tel Aviv University - Faculty of Management
June 1, 2007
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
We develop a measure (based on the relative slopes of the demand and supply schedules) quantifying the asymmetric presence of liquidity traders in the market: a steeper slope of the demand (supply) schedule indicates a concentration of liquidity traders on the demand (supply) side. Using the opening session of the Tel Aviv Stock Exchange we demonstrate the predictive power of our measure. Consistent with theory, we find that the concentration of liquidity traders on the demand (supply) side is negatively (positively) correlated with future returns. We find that liquidity traders are likely to arrive at the market together (commonality).
Number of Pages in PDF File: 50
Keywords: liquidity traders, liquidity, transparency, return predictability, commonality of liquidity, contagion, elasticity, liquidity
JEL Classification: G12, G14Accepted Paper Series
Date posted: March 2, 2002 ; Last revised: December 14, 2008
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