Economics, Econometrics and Finance
4 years ago

Stock prices and liquidity linked by common factors, impacting market stability.

Journal of Financial Economics
Common factors in prices, order flows, and liquidity
Joel Hasbrouck

Paper Summary

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The article explores how common factors affect stock prices and trading in the stock market. By analyzing data from 30 Dow stocks, the researchers found that both returns and order flows are influenced by common factors. These common factors in order flows explain a large portion of the commonality in returns. Additionally, the study looked at liquidity measures like bid-ask spreads and quote sizes, which help explain changes in trade impacts. Overall, common factors play a significant role in price discovery and liquidity provision in equity markets.