Common Factors in Prices, Order Flows and Liquidity

31 Pages Posted: 7 Nov 2008

See all articles by Joel Hasbrouck

Joel Hasbrouck

New York University (NYU) - Department of Finance

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business

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Date Written: December 1998

Abstract

How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets? We investigate two aspects of this question for the thirty Dow stocks. First, using principal components and canonical correlation analyses we find that both returns and order flows are characterized by common factors. Commonality in theorder flows explains roughly half of the commonality in returns. Second, we examinevariation and common covariation in various liquidity proxies and market depth (tradeimpact) coefficients. Liquidity proxies such as the bid-ask spread and bid-ask quote sizes exhibit time variation which helps explain time variation in trade impacts. The common factors in these liquidity proxies are relatively small, however.

Suggested Citation

Hasbrouck, Joel and Seppi, Duane J., Common Factors in Prices, Order Flows and Liquidity (December 1998). NYU Working Paper No. FIN-99-011. Available at SSRN: https://ssrn.com/abstract=1296398

Joel Hasbrouck (Contact Author)

New York University (NYU) - Department of Finance ( email )

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Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2298 (Phone)
412-268-8896 (Fax)

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