Author
Tarun Chordia
Other affiliations: Deakin University, Vanderbilt University
Bio: Tarun Chordia is an academic researcher from Emory University. The author has contributed to research in topics: Market liquidity & Trading strategy. The author has an hindex of 59, co-authored 134 publications receiving 21490 citations. Previous affiliations of Tarun Chordia include Deakin University & Vanderbilt University.
Papers published on a yearly basis
Papers
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TL;DR: In this article, the authors examined the relation between stock returns, measures of risk, and several non-risk security characteristics, including the book-to-market ratio, firm size, the stock price, the dividend yield, and lagged returns.
1,552 citations
TL;DR: In this paper, the authors studied aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample and found that daily changes in market averages of liquidity and trading activities are highly volatile and negatively serially dependent.
Abstract: Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong dayof-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long- and short-term interest rates inf luence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements. LIQUIDITY AND TRADING ACTIVITY are important features of financial markets, yet little is known about their evolution over time or about their time-series determinants. Their fundamental importance is exemplified by the inf luence of trading costs on required returns ~Amihud and Mendelson ~1986!, and Jacoby, Fowler, and Gottesman ~2000!! which implies a direct link between liquidity and corporate costs of capital. More generally, exchange organization, regulation, and investment management could all be improved by knowledge of factors that inf luence liquidity and trading activity. A better understanding of these determinants should increase investor confidence in financial markets and thereby enhance the efficacy of corporate resource allocation. Notwithstanding the importance of research about liquidity, existing studies of trading costs have all been performed over short time spans of a year or less. In addition, these studies have usually focused on the liquidity of individual securities. This is probably due to the tedious task of handling voluminous intraday data and, until recently, the paucity of intraday data going back more than a few years. Thus, virtually nothing is known about
1,460 citations
TL;DR: In this article, a wider-angle lens exposes an imposing image of commonality in market microstructure, showing that quoted spreads, quoted depth, and effective spreads co-move with market and industry-wide liquidity.
Abstract: Traditionally and understandably, the microscope of market microstructure has focused on attributes of single assets. Little theoretical attention and virtually no empirical work has been devoted to common determinants of liquidity nor to their empirical manifestation, correlated movements in liquidity. But a wider-angle lens exposes an imposing image of commonality. Quoted spreads, quoted depth, and effective spreads co-move with market- and industry-wide liquidity. After controlling for well-known individual liquidity determinants such as volatility, volume, and price, common influences remain significant and material. Recognizing the existence of commonality is a key to uncovering some suggestive evidence that inventory risks and asymmetric information both affect intertemporal changes in liquidity.
1,410 citations
TL;DR: In this paper, a wider-angle lens exposes an imposing image of commonality, showing that quoted spreads, quoted depth, andective spreads co-move with market and industry-wide liquidity.
1,253 citations
TL;DR: The authors argue that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns and that these payoffs disappear once returns are adjusted for variations in expected returns.
Abstract: In recent years there has been a dramatic growth in academic interest in the predictability of asset returns based on past history. A growing number of researchers argue that time-series patterns in returns are due to investor irrationality, and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation, and is at odds with market efficiency. This paper argues that profits to momentum strategies are a result of persistent differences in conditionally expected returns, and are consistent with time-varying expected returns. Standard macroeconomic variables are able to predict momentum payoffs, and these payoffs disappear once returns are adjusted for variations in expected returns.
838 citations
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TL;DR: In this article, the authors show that expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock ex ante excess return partly represents an illiquid price premium, which complements the cross-sectional positive return-illiquidity relationship.
5,636 citations
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Abstract: New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.
5,333 citations
TL;DR: In this article, the authors investigated whether marketwide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.
Abstract: This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.
4,048 citations
TL;DR: The authors proposed a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes.
Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ~“momentum”!, short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to ref lect all publicly available information. Some of the more pervasive anomalies can be classified as follows ~Appendix A cites the relevant literature!: 1. Event-based return predictability ~public-event-date average stock returns of the same sign as average subsequent long-run abnormal performance! 2. Short-term momentum ~positive short-term autocorrelation of stock returns, for individual stocks and the market as a whole!
4,007 citations
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TL;DR: In this article, the authors provide a model that links an asset's market liquidity and traders' funding liquidity, i.e., the ease with which they can obtain funding, to explain the empirically documented features that market liquidity can suddenly dry up, has commonality across securities, is related to volatility, is subject to flight to quality, and comoves with the market.
Abstract: We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to “flight to quality¶, and (v) comoves with the market, and it provides new testable predictions. Keywords: Liquidity Risk Management, Liquidity, Liquidation, Systemic Risk, Leverage, Margins, Haircuts, Value-at-Risk, Counterparty Credit Risk
3,638 citations