How Do Shocks Arise and Spread Across Stock Markets? A Microstructure Perspective
Abstract
We study intraday, market-wide shocks to stock prices, market liquidity, and trading activity on international stock markets and assess the relevance of recent theories on "liquidity dry-ups" in explaining such shocks. Market-wide price shocks are prevalent and large, with rapid spillovers across markets. However, price shocks are predominantly driven by information; they do not revert and are often associated with macroeconomic news. Furthermore, liquidity shocks are typically isolated and transitory. Overall, we find little evidence for liquidity effects fomenting price shocks or non-fundamental contagion, nor for alternative explanations. Market-wide liquidity dry-ups are thus of little concern to international investors.
Additional Information
© 2021, INFORMS. Received: February 6, 2019. Revised: July 17, 2020. Accepted: December 4, 2020. Published Online in Articles in Advance: July 29, 2021. Accepted by Karl Diether, finance. This work was supported by Nederlandse Organisatie voor Wetenschappelijk Onderzoek [Vidi Grant 452-08-012]. M. van Dijk gratefully acknowledges financial support from the Vereniging Trustfonds Erasmus Universiteit Rotterdam. This work was carried out on the national e-infrastructure with the support of SURF Foundation. The authors thank Yakov Amihud, Torben Andersen, James Brugler, Joachim Grammig, Patrick Groenen, Charles-Albert Lehalle, Francis Longstaff, Albert Menkveld, Loriana Pelizzon, Asani Sarkar, Ramabhadran Thirumalai, Michel van der Wel, Christian Voight, Avi Wohl, seminar participants at Erasmus University, and conference participants at the Centre for Applied Research on International Markets, Money Banking and Regulation (Baffi Carefin) conference on "The Development of Securities Markets: Trends, Risks and Policies" (2017, Milan), the Annual Conference in International Finance (2016, Hong Kong), the 7th Behavioral Finance Conference (2016, Miami), the Financial Times Stock Exchange (FTSE)/Russell World Investment Forum (2016, Sea Island, Georgia), the 8th Financial Risks International Forum (2015, Paris), the 5th Emerging Markets Finance Conference (2014, Bombay), the Extreme Events in Finance conference (2014, Royaumont, France), the German Finance Association meeting (2014, Karlsruhe), and the International Network for Economic Research (INFER) Workshop on "Financial Globalization, International Trade and Development" (2014, Bordeaux) for helpful comments. The authors thank Michel van der Wel for sharing the U.S. macro news announcements data. The authors thank OneMarket Data for the use of their OneTick software.Attached Files
Accepted Version - SSRN-id2475518.pdf
Supplemental Material - mnsc.2021.3979.sm1.pdf
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Additional details
- Eprint ID
- 113882
- Resolver ID
- CaltechAUTHORS:20220310-752445000
- 452-08-012
- Nederlandse Organisatie voor Wetenschappelijk Onderzoek (NWO)
- Vereniging Trustfonds Erasmus Universiteit Rotterdam
- SURF Foundation
- Created
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2022-03-14Created from EPrint's datestamp field
- Updated
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2022-05-03Created from EPrint's last_modified field