arXiv 1 Jul 2026 · Econometrics
arXiv:2607.01377 · PDF · DOI · OpenAlex · Extracted main text
We estimate Kyle's (1985) price-impact coefficient $λ$ directly from daily equity order flow and test its ability to forecast the cross-section of subsequent stock returns. Using CRSP data from 2020 to 2025, we construct firm-month measures of signed order flow and two estimators of $\hatλ_{it}$: a within-month price-impact regression and an Amihud-style ratio. Signed order flow strongly predicts contemporaneous and one-month-ahead returns, while volume volatility predicts lower subsequent returns, consistent with widening price impact degrading price discovery. Fama-MacBeth regressions confirm that our order-flow signal carries significant cross-sectional return information after Newey--West adjustment. Theoretically, we resolve the liquidity premium puzzle of Constantinides (1986) through an adverse-selection mechanism: low order flow widens $λ$ and depresses prices today; subsequent normalization restores prices, generating the illiquidity premium without risk-based compensation.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Kyle, Albert S (1985) Continuous Auctions and Insider Trading | 1.000 | 19 | 6 | 100% |
| 2 | Glosten, Lawrence R. and Milgrom, Paul R (1985) Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders | 1.000 | 6 | 4 | 100% |
| 3 | David Easley and Nicholas M. Kiefer and Maureen O'Hara and Joseph B.… (1996) Liquidity, Information, and Infrequently Traded Stocks | 1.000 | 5 | 5 | 100% |
| 4 | George M. Constantinides (1986) Capital Market Equilibrium with Transaction Costs | 1.000 | 5 | 4 | 100% |
| 5 | Yakov Amihud (2002) Illiquidity and stock returns: cross-section and time-series effects | 0.928 | 4 | 3 | 100% |
| 6 | Pástor, Lubo s and Stambaugh, Robert F (2003) Liquidity Risk and Expected Stock Returns | 0.928 | 4 | 3 | 100% |
| 7 | Acharya, Viral V. and Pedersen, Lasse H (2005) Asset Pricing with Liquidity Risk | 0.843 | 3 | 3 | 100% |
| 8 | Back, Kerry (1992) Insider Trading in Continuous Time | 0.843 | 3 | 3 | 100% |
| 9 | Amihud, Yakov (2002) Illiquidity and Stock Returns: Cross-Section and Time-Series Effects | 0.737 | 3 | 2 | 100% |
| 10 | Chen, Jieyi (2022) An Overview of Bond Pricing Models and Duration of Bonds | 0.737 | 3 | 2 | 100% |
Showing the top 10 of 39 scored citations.