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Does Order Flow Commonality Extend Across Trade Sizes and Securities?

By J. Christopher Hughen and Cynthia G. McDonald

Abstract

We examine commonality in order imbalances across different types of securities and find that the extent of commonality is greater than previously documented. Order imbalances in portfolios of small stocks, large stocks, and closed-end funds have explanatory power for other portfolio returns even in the presence of own order flow. Our analysis of order flow composition reveals commonality in small and medium trades, but not in large trades, across portfolios. The activity from small-size trades is systemic, but not generally associated with returns on other securities. Order imbalances from larger size trades provide more information relevant to stock prices. Copyright (c) 2006 Financial Management Association International.

DOI identifier: 10.1111/j.1755-053X.2006.tb00133.x
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