Endogenous Market Statistics and Security Pricing: An Empirical Investigation
Journal of Financial Markets, Vol. 1, pp. 285-319, 1998
Posted: 9 Mar 2008
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
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