Title: Liquidity taking and stock returns
Authors: Sindhuja Ranganathan - Tampere University of Technology (Finland)
Milla Siikanen - Tampere University of Technology (Finland) [presenting]
Juho Kanniainen - Tampere University of Technology (Finland)
Abstract: Most of the modern stock exchanges are organized as centralized limit order books, where investors may choose to take or make liquidity by submitting either market or limit orders. We study the relationship between the imbalance of liquidity taking on buy versus sell sides and past and future returns for different investor categories. From our unique data set, we identify trades of different types of investors, namely financial, non-financial, and non-profit institutions, households and foreign investors, and whether the investor was on the market or the limit order side of the transactions. From this, we calculate the imbalance between liquidity taking on buy versus sell side of the limit order book for each investor group. Preliminary results over all investors indicate that higher past returns lead to more liquidity taking on sell side, whereas high returns are preceded by more liquidity taking on buy side. The results for households, and non-financial and non-profit institutions are mainly similar when compared to the results on all the investors. Interestingly, for financial institutions, higher past returns seem to be related to more liquidity taking on buy side. For the heterogeneous group of foreign investors, we find hardly any statistically significant association between imbalance in liquidity taking and returns.