Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2019
Abstract
We propose that the volatility of order flow is a proxy for costs of information asymmetry, as order flow volatility varies positively with parameters that also influence adverse selection costs of trading. Empirically, order flow volatility is significantly higher prior to earnings or merger announcements when information asymmetry is likely to be elevated. Levels of and shocks to order flow volatility are positively and significantly correlated with existing illiquidity proxies, and strongly predict stock returns in the cross section. The impact of order imbalance volatility shocks on stock prices is reflected within one month in large, visible stocks, but takes up to three months to be fully reflected in small, "neglected" stocks.
Keywords
Order flow, required returns, expected returns
Discipline
Business | Finance and Financial Management
Research Areas
Finance
Publication
Management Science
Volume
65
Issue
4
First Page
1455
Last Page
1947
ISSN
0025-1909
Identifier
10.1287/mnsc.2017.2848
Publisher
INFORMS
Citation
CHORDIA, Tarun; HU, Jianfeng; SUBRAHMANYAM, Avanidhar; and TONG, Qing.
Order flow volatility and equity costs of capital. (2019). Management Science. 65, (4), 1455-1947.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/4552
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1287/mnsc.2017.2848