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Liquidity dynamics and cross-autocorrelations

journal contribution
posted on 2011-06-01, 00:00 authored by Tarun ChordiaTarun Chordia, A Sarkar, A Subrahmanyam
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 leadlag relation is stronger before macro announcements (when information-based trading is more likely) and weaker afterward (when information asymmetries are lower).

History

Journal

Journal of Financial and Quantitative Analysis

Volume

46

Pagination

709-736

Location

United Kingdom

ISSN

0022-1090

eISSN

1756-6916

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2011, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON

Issue

03

Publisher

Cambridge University Press

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