Detecting Liquidity Traders
50 Pages Posted: 2 Mar 2002 Last revised: 14 Dec 2008
Date Written: June 1, 2007
We develop a measure (based on the relative slopes of the demand and supply schedules) quantifying the asymmetric presence of liquidity traders in the market: a steeper slope of the demand (supply) schedule indicates a concentration of liquidity traders on the demand (supply) side. Using the opening session of the Tel Aviv Stock Exchange we demonstrate the predictive power of our measure. Consistent with theory, we find that the concentration of liquidity traders on the demand (supply) side is negatively (positively) correlated with future returns. We find that liquidity traders are likely to arrive at the market together (commonality).
Keywords: liquidity traders, liquidity, transparency, return predictability, commonality of liquidity, contagion, elasticity, liquidity
JEL Classification: G12, G14
Suggested Citation: Suggested Citation