SHORT-TERM TRADERS AND LIQUIDITY - A TEST USING BOMBAY STOCK-EXCHANGEDATA

The abolition and reinstatement of the forward trading facility (Badla ) on the Bombay Stock Exchange is used to study the effect of short-te rm traders on share prices and liquidity, The reactions of stock price s to the ban reveal an average negative abnormal return of 15% on Badl a stocks as compared to the non-Badla stocks. The ensuing period shows a significant decline in the liquidity of the Badla Stocks related to the announcement period CARs. Our results suggest that the market per ceives short-term traders as playing a significant positive role, with a larger benefit accruing to the relatively less-liquid stocks. (C) 1 998 Elsevier Science S.A. All rights reserved.