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Detecting Liquidity Traders

Published online by Cambridge University Press:  01 February 2009

Avner Kalay  and
Avi Wohl
Avner Kalay
Affiliation:
Tel Aviv University and University of Utah, Faculty of Management, Tel Aviv University, POB 39010, Tel Aviv 69978, Israel. kalay1@post.tau.ac.il
Avi Wohl
Affiliation:
Tel Aviv University, Faculty of Management, POB 39010, Tel Aviv 69978, Israel. aviwohl@post.tau.ac.il
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Abstract

We develop a measure (based on the relative slopes of the demand and supply schedules) quantifying the asymmetric presence of liquidity traders in the market: a steeper slope of the demand (supply) schedule indicates a concentration of liquidity traders on the demand (supply) side. Using the opening session of the Tel Aviv Stock Exchange, we demonstrate the predictive power of our measure. Consistent with theory, we find that the concentration of liquidity traders on the demand (supply) side is negatively (positively) correlated with future returns. We find that liquidity traders are likely to arrive at the market together (commonality).

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 29 - 54
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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