What Characterizes Commonality on European NYSE Euronext Markets?

34 Pages Posted: 8 May 2011 Last revised: 11 May 2011

See all articles by Catherine D'Hondt

Catherine D'Hondt

UCLouvain - Louvain School of Management

Christophe Majois

Financial Services and Markets Authority (FSMA)

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2011

Abstract

Using a rich dataset of orders and trades for a sample of stocks listed on the four European markets of NYSE Euronext, we apply principal component analysis and provide evidence on the existence and magnitude of commonality in returns, order flow and liquidity. We show that commonality in order flow mainly comes from foreign market members acting for their own account. Proprietary trading is a major driver in trade imbalance and return commonality. Next, we provide evidence on commonality in hidden liquidity. In contrast to commonality in visible depth that is the strongest for large fi rms, comovements in hidden depth seem to be stronger for small caps. We also show that commonality in returns, order flow and liquidity is not constant throughout the day. The opening of US markets is a key moment where commonality often reaches its maximum level.

Keywords: Commonality, Proprietary Trading, Hidden Liquidity

JEL Classification: G14, G10

Suggested Citation

D'Hondt, Catherine and Majois, Christophe, What Characterizes Commonality on European NYSE Euronext Markets? (February 15, 2011). International Conference of the French Finance Association (AFFI), May 2011. Available at SSRN: https://ssrn.com/abstract=1834383

Catherine D'Hondt (Contact Author)

UCLouvain - Louvain School of Management ( email )

151 Chaussée de Binche
Mons, 7000
Belgium

Christophe Majois

Financial Services and Markets Authority (FSMA) ( email )

Rue du Congrès/Congresstraat 12-14
Brussels, 1000
Belgium
+32 2 220 58 46 (Phone)

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