Liquidity, resiliency and market quality around predictable trades

Theory and evidence

Hendrik Bessembinder, Allen Carrion, Laura Tuttle, Kumar Venkataraman

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades' temporary price impacts are quickly reversed, and that competition among strategic traders strictly improves market quality. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable "roll" trades undertaken by a large exchange-traded fund (ETF). The evidence indicates narrower bid-ask spreads, greater order book depth, and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence imply that traders supply liquidity to rather than exploit predictable trades in resilient markets.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StateAccepted/In press - Nov 6 2014

Fingerprint

Liquidity
Traders
Resiliency
Trade theory
Market quality
Price impact
Exchange traded funds
Trading activity
Liquidation
Empirical evidence
Bid/ask spread
Strategic trading
Monopolist
Order book

Keywords

  • Commodity trading
  • ETFs
  • Predatory trading
  • Resiliency
  • Sunshine trading
  • Trading costs

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

Liquidity, resiliency and market quality around predictable trades : Theory and evidence. / Bessembinder, Hendrik; Carrion, Allen; Tuttle, Laura; Venkataraman, Kumar.

In: Journal of Financial Economics, 06.11.2014.

Research output: Contribution to journalArticle

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