December 31, 1998
Joel Hasbrouck, Duane J. Seppi
ABSTRACT
How important are cross-stock common factors in the price discovery/liquidity provision process in equity markets?
We investigate two aspects of this question for the thirty Dow stocks. First, using principal components and canonical
correlation analyses we find that both returns and order flows are characterized by common factors. Commonality
in the order flows explains roughly half of the commonality in returns. Second, we examine variation and common
covariation in various liquidity proxies and market depth (trade impact) coefficients. Liquidity proxies such as
the bid-ask spread and bid-ask quote sizes exhibit time variation which helps explain time variation in trade impacts.
The common factors in these liquidity proxies are relatively small, however.
Category: "Market Microstructure"
Hasbrouck: (212) 998-0310 jhasbrou@stern.nyu.edu
Seppi: (412) 268-2298 ds64@andrew.cmu.edu
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