Why is equity order flow so persistent?

Bence Toth, Imon Palit, Fabrizio Lillo, J Doyne Farmer

    Research output: Contribution to journalArticleResearchpeer-review

    17 Citations (Scopus)

    Abstract

    Order flow in equity markets is remarkably persistent in the sense that order signs (to buy or sell) are positively auto correlated 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.
    Original languageEnglish
    Pages (from-to)218 - 239
    Number of pages22
    JournalJournal of Economic Dynamics and Control
    Volume51
    DOIs
    Publication statusPublished - 2015

    Cite this

    Toth, Bence ; Palit, Imon ; Lillo, Fabrizio ; Farmer, J Doyne. / Why is equity order flow so persistent?. In: Journal of Economic Dynamics and Control. 2015 ; Vol. 51. pp. 218 - 239.
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    Why is equity order flow so persistent? / Toth, Bence; Palit, Imon; Lillo, Fabrizio; Farmer, J Doyne.

    In: Journal of Economic Dynamics and Control, Vol. 51, 2015, p. 218 - 239.

    Research output: Contribution to journalArticleResearchpeer-review

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    AU - Toth, Bence

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    AU - Lillo, Fabrizio

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