Order Flow Volatility and Equity Costs of Capital

Tarun Chordia (), Jianfeng Hu (), Avanidhar Subrahmanyam () and Qing Tong ()
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Tarun Chordia: Goizueta Business School, Emory University, Atlanta, Georgia 30322
Jianfeng Hu: Lee Kong Chian School of Business, Singapore Management University, Singapore 178899
Avanidhar Subrahmanyam: School of Management and Engineering, Nanjing University, 210093 Nanjing, China; UCLA Anderson Graduate School of Management, University of California, Los Angeles, Los Angeles, California 90095
Qing Tong: Lee Kong Chian School of Business, Singapore Management University, Singapore 178899

Management Science, 2019, vol. 65, issue 4, 1520-1551

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 four months to be fully reflected in small, “neglected” stocks.

Keywords: asset pricing; investment; order flow (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (13)

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