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

Sandro Andrade, Charles Chang, Mark S. Seasholes

Research output: Contribution to journalArticle

42 Citations (Scopus)

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

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Price pressure
Stock prices
Reversal
Imbalance
Stock returns
Cash flow
Taiwan Stock Exchange
Risk-averse
Assets
Liquidity

Keywords

  • Excess volatility
  • Return predictability
  • Return reversals

ASJC Scopus subject areas

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

Cite this

Trading imbalances, predictable reversals, and cross-stock price pressure. / Andrade, Sandro; Chang, Charles; Seasholes, Mark S.

In: Journal of Financial Economics, Vol. 88, No. 2, 01.05.2008, p. 406-423.

Research output: Contribution to journalArticle

Andrade, Sandro ; Chang, Charles ; Seasholes, Mark S. / Trading imbalances, predictable reversals, and cross-stock price pressure. In: Journal of Financial Economics. 2008 ; Vol. 88, No. 2. pp. 406-423.
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