Liquidity,Volume, and Order Imbalance Volatility |
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| Authors: | VINCENT BOGOUSSLAVSKY PIERRE COLLIN-DUFRESNE |
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| Institution: | 1. Vincent Bogousslavsky is with Boston College, Carroll School of Management, and Pierre Collin-Dufresne is with EPFL, Swiss Finance Institute, and CEPR. We thank our discussants David Cimon, Itay Goldstein, Andrei Kirilenko, Dmitry Livdan, Bart Yueshen, and Haoxiang Zhu for useful comments. We also thank two referees;2. an Associate Editor;3. Stefan Nagel (the Editor);4. Pierluigi Balduzzi;5. and conference and seminar participants at the AFA, Bentley University, Boston College, CFM-Imperial workshop, CEPR ESSFM Asset Pricing, EFA, FRIC, IMFC, Laval, LBS Summer Symposium, NFA, and SFI Research Days for helpful comments. A previous version of this paper was circulated under the title “Liquidity, Volume, and Volatility.” The authors have read The Journal of Finance disclosure policy and have no conflicts of interest to 6. disclose. |
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| Abstract: | We examine the dynamics of liquidity using a comprehensive sample of U.S. stocks in the post-decimalization period. Motivated by a continuous-time inventory model, we compute a high-frequency measure of order imbalance volatility to proxy for the inventory risk faced by liquidity providers. We show that high-frequency order imbalance volatility is an important driver of liquidity and explains the often positive time-series relation between spread and volume for large stocks, which seems to run counter to most theoretical models. Furthermore, order imbalance volatility is priced in the cross-section of stock returns. |
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