Intraday liquidity dynamics around price jumps

Petitjean, Mikael [UCL]

We study the intraday dynamics of liquidity around price jumps using trades and quotes data sampled at the 2-minute frequency for the 30 constituents of the Dow Jones Industrial Average (DJIA) index. Based on an original event-type methodology, we shed new light on the debate about the liquidity response by market participants to information arrivals. Although the relationship between jumps and market liquidity depends on the respective dimensions of liquidity, jumps do not seem to result from an endogenous deficient provision of market liquidity. We complement the event study by showing that liquidity shocks in the effective spread and the number of trades contribute the most to the likelihood of jumps. Price jumps on DJIA stocks are also much more driven by the arrival of firm-specific news than by the arrival of macroeconomic news announcements. Finally, liquidity variables are shown to contribute to price discovery. The contribution of liquidity variables to price discovery is nevertheless not much affected by the occurrence of jumps or the arrival of news. Overall, order imbalance appears to be the most informative liquidity variable with respect to price discovery, especially after the arrival of news.