Faculty Digital Archive

Archive@NYU >
Stern School of Business >
Economics Working Papers >

Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26616

Title: Investor Uncertainty and Order Flow Information
Authors: Saar, Gideon
Issue Date: Nov-2001
Series/Report no.: FIN-01-063
Abstract: This paper proposes an alternative explanation for the price impact of trades created by information that is carried in the order flow. Unlike models that consider information asymmetry about the future cash flows (or liquidation value) of the asset, the approach here postulates uncertainty about the distribution of preferences and endowments of investors. This investor uncertainty results in prices moving on trades and therefore creates a spread between the bid and the ask. Greater investor uncertainty increases the spread, decreases expected trading volume, and lowers the welfare of all investors in the market. Hence, all investors are better off if market makers are expert in assessing the distribution of preferences and endowments of the investor population. The information content of the order flow is further investigated by applying an econometric spread decomposition procedure to data generated by simulating the model. The results indicate that a significant adverse selection component of the spread can arise solely due to the informational effects of investor uncertainty.
URI: http://hdl.handle.net/2451/26616
Appears in Collections:Economics Working Papers

Files in This Item:

File Description SizeFormat
FIN-01-063.pdf365 kBAdobe PDFView/Open

Items in Faculty Digital Archive are protected by copyright, with all rights reserved, unless otherwise indicated.

 

The contents of the FDA may be subject to copyright, be offered under a Creative Commons license, or be in the public domain.
Please check items for rights statements. For information about NYU’s copyright policy, see http://www.nyu.edu/footer/copyright-and-fair-use.html 
Valid XHTML 1.0 | CSS