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Common Factors in Prices, Order Flows and Liquidity

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  • Joel Hasbrouck
  • Duane J. Seppi

Abstract

How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets? We investigate two aspects of this question for the thirty Dow stocks. First, using principal components and canonical correlation analyses we find that both returns and order flows are characterized by common factors. Commonality in the order flows explains roughly half of the commonality in returns. Second, we examine variation and common covariation in various liquidity proxies and market depth (trade impact) coefficients. Liquidity proxies such as the bid-ask spread and bid-ask quote sizes exhibit time variation which helps explain time variation in trade impacts. The common factors in these liquidity proxies are relatively small, however.

Suggested Citation

  • Joel Hasbrouck & Duane J. Seppi, 1998. "Common Factors in Prices, Order Flows and Liquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-011, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-011
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99011.pdf
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    References listed on IDEAS

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