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Primary Article

The Changing State of the NYSE Market

New Common Factors, Players, and Impulse Responses

Sugato Chakravarty, Frederick H. deB. Harris and Robert A. Wood
Trading Winter 2009, 2009 (1) 120-146
Sugato Chakravarty
A professor and the head of the Department of Consumer Sciences at Purdue University in West Lafayette, IN.
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  • For correspondence: sugato@purdue.edu
Frederick H. deB. Harris
McKinnon professor of economics and finance at Babcock Graduate School of Management, Wake Forest University in Winston-Salem, NC.
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  • For correspondence: rick.harris@mba.wfu.edu
Robert A. Wood
a university distinguished professor of finance at Fogelman College of Business and Economics, University of Memphis in Memphis, TN.
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  • For correspondence: rwood@memphis.edu
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Abstract

This article investigates the impulse response path through which an information or liquidity shock reveals itself first in depths and then in subsequent adjustments of the spread. A three-equation error correction model investigates the equilibrium properties of spread and depth adjustment. In particular, the authors estimate orthogonalized impulse responses and Gonzalo-Granger common factor weights to discern whether spreads or depths are first to permanently impound the common stochastic trends in liquidity and information fundamentals. Using three years of NYSE quote data on the DJIA stocks, the authors show that depths decline in response to positive shocks to the spread but that this effect is not permanent. In contrast, spreads widen initially in response to positive depth shocks as orders “walk the book,” but subsequent net tightening occurs within less than two minutes and proves to be a permanent effect. As order flow imbalance appears, the resulting quote changes quickly elicit undisplayed (off-market) liquidity. We conclude that the NYSE book refreshes very quickly.

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The Changing State of the NYSE Market
Sugato Chakravarty, Frederick H. deB. Harris, Robert A. Wood
Trading Dec 2009, 2009 (1) 120-146;

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The Changing State of the NYSE Market
Sugato Chakravarty, Frederick H. deB. Harris, Robert A. Wood
Trading Dec 2009, 2009 (1) 120-146;
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