Abstract

http://ssrn.com/abstract=891745
 
 

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Order Flow and Prices


Ekkehart Boehmer


Singapore Management University - Lee Kong Chian School of Business

Juan (Julie) Wu


University of Georgia

April 5, 2008

AFA 2007 Chicago Meetings Paper

Abstract:     
We provide new evidence on the relation between order flow and prices, an issue that is central to asset pricing and market microstructure. We examine proprietary data on a broad panel of NYSE-listed stocks that reveal daily order imbalances by institutions, individuals, and market makers. We can further differentiate regular institutional trades from institutional program trades. Our results indicate that order imbalances from different trader types play distinctly different roles in price formation. Institutions and individuals are contrarians with respect to previous-day returns, but differ in the effect their order imbalances have on contemporaneous returns. Institutional imbalances are positively related to contemporaneous returns, and we provide cross-sectional evidence that this relation is likely to be the result of firm-specific information institutions have. Individuals, specialists, and other market makers appear to provide liquidity to these actively trading institutions. Our results also suggest a special role for institutional program trades, which tend to be uninformed and provide liquidity to more aggressively trading institutions. Finally, institutional non-program imbalances (information which is not available to market participants) have predictive power for next-day returns.

Number of Pages in PDF File: 45

Keywords: Order flow, price formation, informed trading, trader types

JEL Classification: G14

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Date posted: March 16, 2006 ; Last revised: April 9, 2008

Suggested Citation

Boehmer, Ekkehart and Wu, Juan (Julie), Order Flow and Prices (April 5, 2008). AFA 2007 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=891745 or http://dx.doi.org/10.2139/ssrn.891745

Contact Information

Ekkehart Boehmer (Contact Author)
Singapore Management University - Lee Kong Chian School of Business ( email )
Singapore

Juan (Julie) Wu
University of Georgia ( email )
Dept. of Finance, Terry College of Business
University of Georgia
Athens, GA 30602-6254
United States
HOME PAGE: http://www.terry.uga.edu/directory/profile/juliewu/
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