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Liquidity Dynamics and Cross-Autocorrelations

Published online by Cambridge University Press:  15 February 2011

Tarun Chordia ,
Asani Sarkar  and
Avanidhar Subrahmanyam
Tarun Chordia
Affiliation:
Goizueta Business School, Emory University, 1300 Clifton Rd., Atlanta, GA 30322. [email protected]
Asani Sarkar
Affiliation:
Federal Reserve Bank of New York, 33 Liberty St., New York, NY 10038. [email protected]
Avanidhar Subrahmanyam
Affiliation:
Anderson Graduate School of Management, University of California at Los Angeles, 110 Westwood Plz., Los Angeles, CA 90095. [email protected]
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Abstract

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 lead-lag relation is stronger before macro announcements (when information-based trading is more likely) and weaker afterward (when information asymmetries are lower).

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 709 - 736
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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