Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-01T12:20:46.931Z Has data issue: false hasContentIssue false
  • English
  • Français

Liquidity Dynamics and Cross-Autocorrelations

Published online by Cambridge University Press:  15 February 2011

Tarun Chordia ,
Asani Sarkar  and
Avanidhar Subrahmanyam
Tarun Chordia
Affiliation:
Goizueta Business School, Emory University, 1300 Clifton Rd., Atlanta, GA 30322. [email protected]
Asani Sarkar
Affiliation:
Federal Reserve Bank of New York, 33 Liberty St., New York, NY 10038. [email protected]
Avanidhar Subrahmanyam
Affiliation:
Anderson Graduate School of Management, University of California at Los Angeles, 110 Westwood Plz., Los Angeles, CA 90095. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the relation between information transmission and cross-autocorrelations. We present a simple model, where informed trading is transmitted from large to small stocks with a lag. In equilibrium, large stock illiquidity induced by informed trading portends stronger cross-autocorrelations. Empirically, we find that the lead-lag relation increases with lagged large stock illiquidity. Further, the lead from large stock order flows to small stock returns is stronger when large stock spreads are higher. In addition, this lead-lag relation is stronger before macro announcements (when information-based trading is more likely) and weaker afterward (when information asymmetries are lower).

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 709 - 736
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (1988), 3–40.CrossRefGoogle Scholar
Avramov, D.; Chordia, T.; and Goyal, A.. “Liquidity and Autocorrelations in Individual Stock Returns.” Journal of Finance, 61 (2006), 2365–2394.Google Scholar
Badrinath, S. G.; Kale, J. R.; and Noe, T. H.. “Of Shepherds, Sheep, and the Cross-Autocorrelations in Equity Returns.” Review of Financial Studies, 8 (1995), 401–430.Google Scholar
Ball, C. A., and Chordia, T.. “True Spreads and Equilibrium Prices.” Journal of Finance, 56 (2001), 1801–1835.Google Scholar
Barberis, N., and Shleifer, A.. “Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.CrossRefGoogle Scholar
Barclay, M. J.; Litzenberger, R. H.; and Warner, J. B.. “Private Information, Trading Volume, and Stock-Return Variances.” Review of Financial Studies, 3 (1990), 233–253.Google Scholar
Beber, A.; Brandt, M. W.; and Kavajecz, K. A.. “What Does Equity Sector Orderflow Tell Us about the Economy? “ Working Paper, Duke University (2008).Google Scholar
Benston, G. J., and Hagerman, R. L.. “Determinants of Bid-Asked Spreads in the Over-the-Counter Market.” Journal of Financial Economics, 1 (1974), 353–364.CrossRefGoogle Scholar
Bernhardt, D., and Mahani, R. S.. “Asymmetric Information and Stock Return Cross-Autocorrelations.” Economics Letters, 96 (2007), 14–22.CrossRefGoogle Scholar
Bessembinder, H., and Chan, K.. “Market Efficiency and the Returns to Technical Analysis.” Financial Management, 27 (1998), 5–17.Google Scholar
Beveridge, S., and Nelson, C. R.. “A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the ‘Business Cycle’.” Journal of Monetary Economics, 7 (1981), 151–174.Google Scholar
Borio, C. E. V., and McCauley, R. N.. “The Economics of Recent Bond Yield Volatility.” BIS Economic Paper No. 45, Bank for International Settlements, Basel, Switzerland (1996).Google Scholar
Boudoukh, J.; Richardson, M. P.; and Whitelaw, R. F.. “A Tale of Three Schools: Insights on Autocorrelations of Short-Horizon Stock Returns.” Review of Financial Studies, 7 (1994), 539–573.Google Scholar
Brandt, M. W., and Kavajecz, K. A.. “Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve.” Journal of Finance, 59 (2004), 2623–2654.Google Scholar
Brennan, M. J.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.CrossRefGoogle Scholar
Chan, K.. “Imperfect Information and Cross-Autocorrelation among Stock Prices.” Journal of Finance, 48 (1993), 1211–1230.Google Scholar
Chan, K., and Fong, W.-M.. “Trade Size, Order Imbalance, and the Volatility-Volume Relation.” Journal of Financial Economics, 57 (2000), 247–273.Google Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Market Liquidity and Trading Activity.” Journal of Finance, 56 (2001), 501–530.Google Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Liquidity and Market Efficiency.” Journal of Financial Economics, 87 (2008), 249–268.Google Scholar
Chordia, T.; Sarkar, A.; and Subrahmanyam, A.. “An Empirical Analysis of Stock and Bond Market Liquidity.” Review of Financial Studies, 18 (2005), 85–129.CrossRefGoogle Scholar
Chordia, T.; Shivakumar, L.; and Subrahmanyam, A.. “Liquidity Dynamics across Small and Large Firms.” Economic Notes, 33 (2004), 111–143.Google Scholar
Chordia, T., and Swaminathan, B.. “Trading Volume and Cross-Autocorrelations in Stock Returns.” Journal of Finance, 55 (2000), 913–935.CrossRefGoogle Scholar
Chowdhry, B., and Nanda, V.. “Multimarket Trading and Market Liquidity.” Review of Financial Studies, 4 (1991), 483–511.Google Scholar
Chung, K. H., and Chuwonganant, C.. “Tick Size, Order Handling Rules, and Trading Costs.” Financial Management, 33 (2004), 47–62.Google Scholar
Clark, R. A.; McConnell, J. J.; and Singh, M.. “Seasonalities in NYSE Bid-Ask Spreads and Stock Returns in January.” Journal of Finance, 47 (1992), 1999–2014.Google Scholar
Connolly, R. A, and Stivers, C. T.. “Time-Varying Lead-Lag of Equity Returns in a World of Incomplete Information.” Working Paper, University of North Carolina at Chapel Hill (1997).Google Scholar
Conrad, J., and Kaul, G.. “An Anatomy of Trading Strategies.” Review of Financial Studies, 11 (1998), 489–519.Google Scholar
Evans, M. D. D., and Lyons, R. K.. “Order Flow and Exchange Rate Dynamics.” Journal of Political Economy, 110 (2002), 170–180.CrossRefGoogle Scholar
Evans, M. D. D., and Lyons, R. K.. “How Is Macro News Transmitted to Exchange Rates?“ Journal of Financial Economics, 88 (2008), 26–50.Google Scholar
Fleming, M. J., and Remolona, E. M.. “Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 1901–1915.CrossRefGoogle Scholar
Gallant, A. R.; Rossi, P. E.; and Tauchen, G.. “Stock Prices and Volume.” Review of Financial Studies, 5 (1992), 199–242.CrossRefGoogle Scholar
Gompers, P. A., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.CrossRefGoogle Scholar
Gorton, G. B., and Pennacchi, G. G.. “Security Baskets and Index-Linked Securities.” Journal of Business, 66 (1993), 1–27.Google Scholar
Hameed, A.. “Time-Varying Factors and Cross-Autocorrelations in Short-Horizon Stock Returns.” Journal of Financial Research, 20 (1997), 435–458.Google Scholar
Hou, K.. “Industry Information Diffusion and the Lead-Lag Effect in Stock Returns.” Review of Financial Studies, 20 (2007), 1113–1138.CrossRefGoogle Scholar
Hou, K., and Moskowitz, T. J.. “Market Frictions, Price Delay, and the Cross-Section of Expected Returns.” Review of Financial Studies, 18 (2005), 981–1020.Google Scholar
Jokivuolle, E.. “Measuring True Stock Index Value in the Presence of Infrequent Trading.” Journal of Financial and Quantitative Analysis, 30 (1995), 455–464.CrossRefGoogle Scholar
Jones, C. M.; Kaul, G.; and Lipson, M. L.. “Transactions, Volume, and Volatility.” Review of Financial Studies, 7 (1994), 631–651.Google Scholar
Kumar, P., and Seppi, D. J.. “Information and Index Arbitrage.” Journal of Business, 67 (1994), 481–509.Google Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading. Econometrica, 53 (1985), 1315–1335.Google Scholar
Lee, C. M. C., and Ready, M. J.. “Inferring Trade Direction from Intraday Data.” Journal of Finance, 46 (1991), 733–747.Google Scholar
Lo, A. W., and MacKinlay, A. C.. “When Are Contrarian Profits Due to Stock Market Overreaction?“ Review of Financial Studies, 3 (1990), 175–205.Google Scholar
Madhavan, A.; Ming, K.; Straser, V.; and Wang, Y.. “How Effective Are Effective Spreads? An Evaluation of Trade Side Classification Algorithms.” Working Paper, ITG, Inc. (2002).Google Scholar
McQueen, G.; Pinegar, M.; and Thorley, S.. “Delayed Reaction to Good News and the Cross-Autocorrelation of Portfolio Returns.” Journal of Finance, 51 (1996), 889–919.Google Scholar
Mech, T. S. “Portfolio Return Autocorrelation.” Journal of Financial Economics, 34 (1993), 307–344.Google Scholar
Mitchell, M.; Pulvino, T.; and Stafford, E.. “Limited Arbitrage in Equity Markets.” Journal of Finance, 57 (2002), 551–584.Google Scholar
Pasquariello, P., and Vega, C.. “Informed and Strategic Order Flow in the Bond Markets.” Review of Financial Studies, 20 (2007), 1975–2019.Google Scholar
Sadka, R., and Scherbina, A.. “Analyst Disagreement, Mispricing, and Liquidity.” Journal of Finance, 62 (2007), 2367–2403.Google Scholar
Schwert, G. W. “Stock Market Volatility and the Crash of ’87.” Review of Financial Studies, 3 (1990), 77–102.Google Scholar