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Trading imbalances, predictable reversals, and cross-stock price pressure

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  • Andrade, Sandro C.
  • Chang, Charles
  • Seasholes, Mark S.
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    Abstract

    We test the implications of a multi-asset equilibrium model in which a finite number of risk-averse liquidity providers accommodate non-informational trading imbalances. These imbalances generate predictable reversals in stock returns. An imbalance in one stock also affects the prices of other stocks. The magnitude of the cross-stock price pressure depends on the correlations of the stocks' underlying cash flows. The model implies that non-informational trading increases the volatility of stock returns. We confirm the model's implications using data from the Taiwan Stock Exchange.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 88 (2008)
    Issue (Month): 2 (May)
    Pages: 406-423

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    Handle: RePEc:eee:jfinec:v:88:y:2008:i:2:p:406-423

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    Web page: http://www.elsevier.com/locate/inca/505576

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    Cited by:
    1. Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
    2. Orhan Erdem & Evren Arik & Serkan Yüksel, 2013. "Trading Puzzle, Puzzling Trade," Working Paper 05, Research and Business Development Department, Borsa Istanbul.
    3. Foucault, Thierry & Themar, David & Sraer, David, 2008. "Individual investors and volatility," Les Cahiers de Recherche 899, HEC Paris.
    4. Chen, Zhijuan & Lin, William T. & Ma, Changfeng & Tsai, Shih-Chuan, 2014. "Liquidity provisions by individual investor trading prior to dividend announcements: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 358-374.
    5. Patrick Roger, 2012. "Portfolio diversification dynamics of individual investors: a new measure of investor sentiment," Working Papers of LaRGE Research Center 2012-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    6. Austin Gerig & David Michayluk, 2014. "Automated Liquidity Provision," Research Paper Series 345, Quantitative Finance Research Centre, University of Technology, Sydney.
    7. Laurence Lescourret, 2012. "Non-fundamental Information and Market-makers' Behavior during the NASDAQ Preopening Session," Post-Print hal-00772798, HAL.
    8. Chang, Charles, 2010. "Herding and the role of foreign institutions in emerging equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 18(2), pages 175-185, April.
    9. Asparouhova, Elena & Bessembinder, Hendrik & Kalcheva, Ivalina, 2010. "Liquidity biases in asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 215-237, May.

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