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

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

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.

Suggested Citation

  • Andrade, Sandro C. & Chang, Charles & Seasholes, Mark S., 2008. "Trading imbalances, predictable reversals, and cross-stock price pressure," Journal of Financial Economics, Elsevier, vol. 88(2), pages 406-423, May.
    • Handle: RePEc:eee:jfinec:v:88:y:2008:i:2:p:406-423
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