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Does screen trading weather the weather? A note on cloudy skies, liquidity, and computerized stock markets

  • Goodfellow, Christiane
  • Schiereck, Dirk
  • Verrier, Tatjana
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    This paper tests for the presence of a weather effect on liquidity in a screen-based electronic stock market. The Exchange Liquidity Measure XLM enables us to separate the effect of cloudy skies on liquidity provided by market makers from this effect on liquidity naturally in the market. The empirical evidence suggests that cloudy skies correspond with high natural liquidity levels and low liquidity injected by market makers. This result is consistent with findings for floor-based stock trading and with the hypothesis that market makers add less value in markets with high natural liquidity.

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    File URL: http://www.sciencedirect.com/science/article/B6W4W-4YB792N-4/2/5f217201f6313d8e054b7ceee579f003
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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (March)
    Pages: 77-80

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    Handle: RePEc:eee:finana:v:19:y:2010:i:2:p:77-80
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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    1. Grammig, J. & Schiereck, D. & Theissen, E., 2001. "Knowing Me, Knowing You: Trader Anonymity and Informed Trading in Parallel Markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35288, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Thomas Gehrig & Matthew Jackson, 1994. "Bid-Ask Spreads with Indirect Competition Among Specialists," Discussion Papers 1107, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. William N. Goetzmann & Ning Zhu, 2003. "Rain or Shine: Where is the Weather Effect?," NBER Working Papers 9465, National Bureau of Economic Research, Inc.
    4. Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
    5. Loughran, Tim & Schultz, Paul, 2004. "Weather, Stock Returns, and the Impact of Localized Trading Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 343-364, June.
    6. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, 06.
    7. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, vol. 93(1), pages 324-343, March.
    8. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    9. Alexandra Hachmeister & Dirk Schiereck, 2010. "Dancing in the dark: post-trade anonymity, liquidity and informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 145-177, February.
    10. Flemisch, M. & Hackethal, A. & Schiereck, D., 2009. "Market Maker unter Wolken - Wettereffekte am deutschen Aktienmarkt," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34880, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    11. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    12. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-45, December.
    13. Hachmeister, A. & Schiereck, D., 2010. "Dancing in the Dark: Post-trade Anonymity, Liquidity, and Informed Trading," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 34883, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
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