New Economics Papers
on Market Microstructure
Issue of 2008‒01‒26
two papers chosen by
Thanos Verousis

  1. Idiosyncratic risk, returns and liquidity in the London Stock Exchange: a spillover approach By Andreas Andrikopoulos; Timotheos Angelidis
  2. Information-Based Trade in the Shanghai StockMarket By Copeland, Laurence; Wong, Woon K; Zhu, Yanhui

  1. By: Andreas Andrikopoulos; Timotheos Angelidis
    Abstract: In the light of recent evidence that liquidity and idiosyncratic risk may be priced factors in the cross section of expected stock returns and that market capitalization significantly affects investor behavior and liquidity, we explore the interactions between liquidity, idiosyncratic risk and return across time as well as across size-based portfolios of stocks listed in the London Stock Exchange. In a Vector Autoregressive (VAR) analytical framework, we find that volatility spills over from large cap stocks to small cap stocks and vice versa. Volatility shocks can be predicted by illiquidity shocks in both large cap as well as in the small cap portfolios. Illiquidity can be predicted by return shocks in small cap stocks. Finally, we document some evidence of asymmetric liquidity spillovers, from large cap stocks to small cap ones, supporting the intuition that common information is first incorporated in the trading behavior of large-cap investors and the liquidity of large cap stocks and is then transmitted in the trading of small stocks.
    Keywords: Liquidity; Spillover.
    Date: 2008
  2. By: Copeland, Laurence (Cardiff Business School); Wong, Woon K (Cardiff Business School); Zhu, Yanhui (Cardiff Business School)
    Abstract: We show that the probability of information-based trade (PIN) played a significant role in explaining monthly returns on Shanghai A shares over the period 2001 to 2006. In particular, PIN, as approximated by order imbalance as a proportion of total transactions, appears to explain returns even after controlling for risk in the much-cited Fama and French (1992) three-factor model. However, we also find that some of the PIN effect appears to be indistinguishable from a turnover effect.
    Date: 2008–01

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