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

Abstract

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. r 2008 Published by Elsevier B.V.JEL classification: G12; G15

The Propagation of Shocks Across International Equity Markets: A Microstructure Perspective

“…A common thread in these theories is that shocks to prices are accompanied by shocks to liquidity and/or trading activity. For example, price shocks can arise because financial intermediaries reduce the supply of liquidity in the face of funding constraints (e.g., Gromb and Vayanos, 2002;Brunnermeier and Pedersen, 2009) or because of a surge in the demand for liquidity when wealth effects, loss limits, or hedging desires induce traders to sell (e.g., Kyle and Xiong, 2001;Morris and Shin, 2004;Andrade, Chang, and Seasholes, 2008).…”

“…2 Recent theoretical studies on such liquidity channels include Kyle and Xiong (2001), Gromb and Vayanos (2002), Kodres and Pritsker (2002), Bernardo and Welch (2004), Morris and Shin (2004), Yuan (2005); Gârleanu and Pedersen (2007), Pasquariello (2007), Andrade, Chang, and Seasholes (2008), Brunnermeier and Pedersen (2009), Huang and Wang (2009), and Cespa and Foucault (2014).…”

Return Predictability and Strategic Trading under Symmetric Information

“…Extensive empirical studies have demonstrated that non-informational trading affects stock prices and returns 1 . Many of them have further shown that noninformational trading can lead to certain predictable patterns of stock returns or can forecast future stock returns.…”

“…Many of them have further shown that noninformational trading can lead to certain predictable patterns of stock returns or can forecast future stock returns. [9] documents positive excess returns in the month following intense buying by individuals and negative excess returns after 1 individuals sell. They suggest that the documented patterns are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy.…”

Non-Fundamental Information and Market-Makers' Behavior During the NASDAQ Preopening Session

“…In asymmetric information models based on Kyle (1985), private information on liquidity-motivated demand allows speculators to better infer the value of fundamentals (e.g., Fishman and Longstaff 1992 ; Madrigal, 1996), to trade on their own account and front-run their clients been documented for other exchanges. 5 The role of liquidity provision when markets open is thus a hotly debated question. My paper shows that the revelation of non-fundamental information is a way for dealers to better manage their inventory exposure.…”