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Commonality on Euronext: Do location and account type matter?

Author

Listed:
  • Catherine d'Hondt
  • Christophe Majois
  • Paolo Mazza

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using a rich dataset of orders and trades for a sample of stocks listed on four Euronext markets, 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 firms, 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. These findings suggest that most of the commonality is driven by foreigners, generating an increase in systematic liquidity risk, due to foreigners' similar trading behaviors, whose importance evolves throughout the day.

Suggested Citation

  • Catherine d'Hondt & Christophe Majois & Paolo Mazza, 2015. "Commonality on Euronext: Do location and account type matter?," Post-Print hal-01667400, HAL.
    • Handle: RePEc:hal:journl:hal-01667400
    DOI: 10.1016/j.irfa.2015.06.007
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    References listed on IDEAS

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    More about this item

    Keywords

    Stocks (Finance); Multiple correspondence analysis (Statistics); Liquidity (Economics); International markets; Existence theorems; Euronext NV;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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