Abstract
We uncover a new determinant of equity costs of capital. Specifically, we show that levels of and shocks to order flow volatility are positively and significantly correlated with existing illiquidity proxies, and strongly predict stock returns in the cross section. The impact of such shocks on stock prices is reflected within one month in large, visible stocks, but takes over six months to be fully reflected in small, “neglected” stocks. We interpret order flow volatility as proxying for costs of information asymmetry, as order flow volatility varies positively with parameters that also influence adverse selection costs of trading.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
