Market Making When the Order-Arrival Process Is the Result of Positive Feedback Training
R. Roll's (1984) measure of serial dependence in successive price changes is amended to account for conditional dependence between type of transaction and type of news. Stock returns become more negatively serially correlated under these conditions. If marketmakers overreact to news, negative serial correlation increases further. Overreaction without signaling can occur when feedback traders base their expectations of the bid-ask spread on quantitative time-series predictions of risk while marketmakers interpret news qualitatively. Empirical results support the hypothesis that periods in which the conditional variance from an ARCH model exceed actual variance have more negatively autocorrelated returns. Copyright 1994 by Blackwell Publishers Ltd and The Victoria University of Manchester
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Volume (Year): 62 (1994)
Issue (Month): 0 (Suppl.)
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