Contacts

Market efficiency, the timely incorporation of information into prices, remains a central and controversial issue in finance. The short-horizon predictability of returns from past order flows is an inverse indicator of efficiency. We analyze this predictability for NYSE stocks that traded every day from 1993 through 2002. Mid-quote return predictability is diminished when bid-ask spreads are narrower, which suggests that outsiders provide greater assistance in absorbing order flows during more liquid periods. Consistent with patterns in liquidity, return predictability is lower in the middle of the trading day, and predictability has declined over time with the minimum tick size (though the long-term trend has been interrupted by sizable fluctuations). As the tick size decreased, open-close/close-open return variance ratios increased while return autocorrelations decreased; this suggests more efficient incorporation of private information