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Models of price formation in securities markets suggest that privately informed investors create significant illiquidily costs for uninformed investors, implying that the required rates of return should be higher for securities that are relatively illiquid. We investigate the empirical relation between monthly stock returns and measures of illiquity(More)
Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in liquidity. But a wider-angle lens exposes an imposing image of(More)
We are especially grateful to Eugene Fama (a referee), an anonymous referee and Bill Schwert (the editor) for insightful and constructive suggestions. We also thank Abstract We examine the relation between stock returns, measures of risk, and several non-risk security characteristics, including the book-to-market ratio, firm size, the stock price, the(More)
Default probabilities are important to the credit markets. Changes in default probabilities may forecast credit rating migrations to other rating levels or to default. Such rating changes can affect the firm's cost of capital, credit spreads, bond returns, and the prices and hedge ratios of credit derivatives. While rating agencies such as Moodys and(More)
We are grateful to an anonymous referee and Bill Schwert (the editor), whose insightful comments and encouragement greatly improved the paper. We also thank Jeff Busse, York for helpful comments and discussions. All errors are our own. Abstract Order Imbalance and Individual Stock Returns This paper studies the relation between order imbalances and daily(More)
In this paper, we shed theoretical and empirical light on short-horizon return reversals. We provide a model of price formation that captures both behavioral and microstruc-ture effects. This model allows us to obtain analytical implications for the conditions required to obtain short-horizon price reversals. Key to distinguishing between inventory and(More)
While many studies have focused on trading volume in the stock market, little is known about why derivatives volume varies in the cross-section or over time. We study time-series properties as well as the determinants of the options/stock trading volume ratio (O/S) using a comprehensive cross-section and time-series of data on equities and their listed(More)
The Cross-Section of Expected Trading Activity This paper studies cross-sectional variations in trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of about 40 years. We test whether trading activity depends upon the degree of liquidity trading, the mass of informed traders, and the extent of uncertainty and dispersion(More)
The capacity of an asset market to accommodate order imbalances, a measure of market efficiency, is inversely related to the predictability of returns from previous order flows. For a comprehensive sample of NYSE stocks that traded every day from 1993 through 2002, we find that very short-term (five-minute) return predictability is strong on average but has(More)