Essays on trades and security prices

This thesis consists of three chapters that investigate the complex relation between security prices and trades of market participants. In the first chapter, I study the evolution of stock prices after trades with different underlying motives using a novel data set of portfolio transitions. Institutional specifics allow me to identify portfolio transition purchases and sales as most likely induced by information-related and liquidity-related factors, respectively. I find that purchases permanently shift stock prices to new levels; moreover, these price changes are more significant after large trades, trades in stocks with a high degree of information asymmetry, and trades that reflect new rather than stale information. At the same time, sales trigger only temporary price pressure effects that are reversed in the following weeks. Thus, my findings provide supporting evidence for a long-standing tenet of market microstructure stating that information-motivated and liquidity-motivated transactions generate different price dynamics. In the second chapter, I analyze the price dynamics in response to trades in more detail; in particular, I focus on the properties of price impact. I explore the following questions: (1) how the price impact coefficients relate to various stock characteristics and differ across trading venues; (2) how they evolve during execution of multi-trade "packages"; and (3) what functional form best describes price impact functions. Regarding most of these questions, there exists an extensive theoretical literature which provides interesting insights. Using a unique data set of portfolio transition trades, I document a number of empirical facts about price impact, some of which can not be easily explained by existing models.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2007

Author dc:creator

• Obizhaeva, Anna

Advisor dc:contributor.advisor

• Jiang Wang.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/40884

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/40884