IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v49y2014i3p511-538.html
   My bibliography  Save this article

Order Flows and Stock Returns: Compensation for Market Makers with Inventory Concerns

Author

Listed:
  • Moonsoo Kang
  • Bong-Soo Lee

Abstract

We investigate whether market makers with inventory concerns are compensated with subsequent monthly returns in the cross-section. We find a significant negative relation between order flows and monthly returns, “the order flow effect,” suggesting that market makers lower prices for stocks with sell order flows and demand a reward in the form of higher expected returns. Further, the order flow effect is stronger for high-volatility or high-volume stocks for which market makers have serious inventory concerns. Funding liquidity of market makers also affects the order flow effect. Finally, our finding is independent of existing regularities and robust to the decimalization.

Suggested Citation

  • Moonsoo Kang & Bong-Soo Lee, 2014. "Order Flows and Stock Returns: Compensation for Market Makers with Inventory Concerns," The Financial Review, Eastern Finance Association, vol. 49(3), pages 511-538, August.
  • Handle: RePEc:bla:finrev:v:49:y:2014:i:3:p:511-538
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/fire.12046
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Allen Carrion & Madhuparna Kolay, 2020. "Trade signing in fast markets," The Financial Review, Eastern Finance Association, vol. 55(3), pages 385-404, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:49:y:2014:i:3:p:511-538. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.