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

Sandro C. Andrade, Charles Chang, Mark S. Seasholes

Research output: Contribution to journalArticlepeer-review

50 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)406-423
Number of pages18
JournalJournal of Financial Economics
Volume88
Issue number2
DOIs
StatePublished - May 1 2008
Externally publishedYes

Keywords

  • Excess volatility
  • Return predictability
  • Return reversals

ASJC Scopus subject areas

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

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