Endogenous Market Statistics and Security Pricing: An Empirical Investigation

Journal of Financial Markets, Vol. 1, pp. 285-319, 1998

Posted: 9 Mar 2008

See all articles by Chuan-Yang Hwang

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Thomas J. George

University of Houston - Department of Finance

Abstract

We examine empirically the degree to which past price changes and volume affect estimates of traders' beliefs about future security price changes. Our estimates indicate that forecasts of the permanent component of price changes occurring after the close of trading are related to past price changes and order flow; and that the strength of this relation increases monotonically across quartiles of stocks having lesser trading activity. These results are consistent with models of technical analysis such as Brown and Jennings (1989), Grundy and McNichols (1989) and Blume, Easley and O'Hara (1994) that ascribe an informational role to past market statistics; and to models in which the process of trading facilitates price discovery such as Madhavan (1992) and Leach and Madhavan (1993). The evidence also suggests that private information is an important determinant of price movements - unexpected order flow explains over one-third of the variation in revisions of forecasts of permanent changes in prices.

JEL Classification: G12

Suggested Citation

Hwang, Chuan-Yang and George, Thomas J., Endogenous Market Statistics and Security Pricing: An Empirical Investigation. Journal of Financial Markets, Vol. 1, pp. 285-319, 1998. Available at SSRN: https://ssrn.com/abstract=1104438

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

Thomas J. George (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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