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

  • Andrade, Sandro C.
  • Chang, Charles
  • Seasholes, Mark S.
Registered author(s):

    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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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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