Cross-asset speculation in stock markets

Bernhardt, D.; Taub, B.

Abstract

In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross-asset factor structure of order flows to that of returns.

Citation

Bernhardt, D., & Taub, B. (2008). Cross-asset speculation in stock markets. Journal of Finance, 63(5), 2385-2427. https://doi.org/10.1111/j.1540-6261.2008.01400.x

• Journal Article Type: Article
• Publication Date: Oct 1, 2008
• Deposit Date: Jul 20, 2011
• Journal: Journal of Finance
• Print ISSN: 0022-1082
• Electronic ISSN: 1540-6261
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 63
• Issue: 5
• Pages: 2385-2427
• DOI: https://doi.org/10.1111/j.1540-6261.2008.01400.x
• Public URL: https://durham-repository.worktribe.com/output/1538528