6533b837fe1ef96bd12a345b
RESEARCH PRODUCT
Why is equity order flow so persistent?
Imon PalitBence TothBence TothJ. Doyne FarmerJ. Doyne FarmerFabrizio LilloFabrizio LilloFabrizio Lillosubject
Economics and EconometricsControl and OptimizationMarket microstructureApplied MathematicsPrice impactAutocorrelationEquity (finance)Market microstructureHerdingBehavioral economicsPositive correlationOrder flowMicroeconomicsOrder splittingStock exchangeBehavioral financeEconomicsEconometricsHerdingdescription
Abstract Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively autocorrelated out to time lags of tens of thousands of orders, corresponding to many days. Two possible explanations are herding, corresponding to positive correlation in the behavior of different investors, or order splitting, corresponding to positive autocorrelation in the behavior of single investors. We investigate this using order flow data from the London Stock Exchange for which we have membership identifiers. By formulating models for herding and order splitting, as well as models for brokerage choice, we are able to overcome the distortion introduced by brokerage. On timescales of less than a few hours the persistence of order flow is overwhelmingly due to splitting rather than herding. We also study the properties of brokerage order flow and show that it is remarkably consistent both cross-sectionally and longitudinally.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2015-02-01 |