Events

Finance Seminar

Authors:

• Mark Seasholes
  The Hong Kong University of Science and Technology

• Terrence Hendershott
  U.C. Berkeley

• Sunny X. Li
  VU University Amsterdam

• Albert J. Menkveld
  VU University Amsterdam

This paper studies the joint dynamics of stock price movements and the trading of individuals, institutions, and market makers. We propose a multi-period model in which agents have different risk sharing motives and participation costs. A state-space model and proprietary NYSE trading data are used to test predictions regarding returns, order flows, and return-flow dynamics. The results show that 25% of monthly return variance is due to transitory price changes (noise). The trading variables explain 40% of this transitory variance. A one standard deviation change in market makers' positions (individuals' net trades) is associated with transitory volatility of 1.52% (also 1.52%). The results are larger for smaller stocks (2.43% and 1.86%).