Intraday Liquidity Dynamics and News Releases around Price Jumps: Evidence from the DJIA Stocks

We study the dynamics of liquidity and news releases around jumps by identifying their intraday timing for the Dow Jones Industrial Average index constituents. Jumps are found to coincide with a significant increase in trading costs and demand for immediacy, amplified by the release of news. Liquidity supply remains nevertheless high and there is strong evidence of resilience. Liquidity shocks in the effective spread and the number of trades are the key drivers behind the occurrence of a jump. Order imbalance appears to be the most informative liquidity variable with respect to price discovery, especially after the arrival of news.

[1]  P. Carr,et al.  What Type of Process Underlies Options? A Simple Robust Test , 2003 .

[2]  B. Radhakrishna,et al.  Inferring investor behavior: Evidence from TORQ data , 2000 .

[3]  N. Shephard,et al.  Realized Kernels in Practice: Trades and Quotes , 2009 .

[4]  T. Bollerslev,et al.  Continuous-Time Models, Realized Volatilities, and Testable Distributional Implications for Daily Stock Returns , 2007 .

[5]  P. Hansen,et al.  Realized Variance and Market Microstructure Noise , 2005 .

[6]  Robert E. Verrecchia,et al.  Market liquidity and volume around earnings announcements , 1994 .

[7]  Jump Robust Volatility Estimation , 2008 .

[8]  Soeren Hvidkjaer,et al.  A Trade-Based Analysis of Momentum , 2005 .

[9]  Thomas J. Finucane.  A Direct Test of Methods for Inferring Trade Direction from Intra-Day Data , 2000 .

[10]  Mikael Petitjean,et al.  Trading Activity, Realized Volatility and Jumps , 2009 .

[11]  R. Jarrow,et al.  Jump Risks and the Intertemporal Capital Asset Pricing Model , 1984 .

[12]  R. C. Merton,et al.  The impact on option pricing of specification error in the underlying stock price returns , 2011 .

[13]  M. Harris,et al.  Differences of Opinion Make a Horse Race , 1993 .

[14]  Michael S. Johannes,et al.  The Statistical and Economic Role of Jumps in Continuous-Time Interest Rate Models , 2004 .

[15]  R. Brooks.  Bid-Ask Spread Components around Anticipated Announcements , 1994 .

[16]  R. C. Merton,et al.  Option pricing when underlying stock returns are discontinuous , 1976 .

[17]  Christine A. Parlour.  Price Dynamics in Limit Order Markets , 1998 .

[18]  Nicholas G. Polson,et al.  The Impact of Jumps in Volatility and Returns , 2000 .

[19]  Olivier Scaillet,et al.  Jumps in High-Frequency Data: Spurious Detections, Dynamics, and News , 2016 .

[20]  Weimin Liu,et al.  A liquidity-augmented capital asset pricing model , 2006 .

[21]  Ernst Schaumburg,et al.  Federal Reserve Bank of New York Staff Reports Jump-robust Volatility Estimation Using Nearest Neighbor Truncation Jump-robust Volatility Estimation Using Nearest Neighbor Truncation , 2010 .

[22]  Adrien Verdelhan,et al.  Information Shocks, Liquidity Shocks, Jumps, and Price Discovery: Evidence from the U.S. Treasury Market , 2009, Journal of Financial and Quantitative Analysis.

[23]  Maureen O'Hara,et al.  Time and the Process of Security Price Adjustment , 1992 .

[24]  Richard Roll,et al.  Orderimbalance, Liquidity and Market Returns , 2001 .

[25]  Charles S. Bos,et al.  Spot Variance Path Estimation and Its Application to High Frequency Jump Testing , 2009 .

[26]  Christopher J. Neely,et al.  Jumps, Cojumps and Macro Announcements , 2009 .

[27]  Yacine Aït-Sahalia,et al.  Disentangling diffusion from jumps , 2004 .

[28]  Alex W. H. Chan.  Merton, Robert C. , 2010 .

[29]  R. Engle.  New Frontiers for Arch Models , 2002 .

[30]  Tim Bollerslev,et al.  Risk, Jumps, and Diversification , 2007 .

[31]  Richard Roll,et al.  Commonality in Liquidity , 1999 .

[32]  Adrien Verdelhan,et al.  Information Shocks, Jumps, and Price Discovery -- Evidence from the U.S. Treasury Market , 2008 .

[33]  P. Carr,et al.  Stochastic Skew in Currency Options , 2004 .

[34]  Nicholas G. Polson,et al.  Optimal Filtering of Jump Diffusions: Extracting Latent States from Asset Prices , 2009 .

[35]  H Eugene Stanley,et al.  Quantifying fluctuations in market liquidity: analysis of the bid-ask spread. , 2005, Physical review. E, Statistical, nonlinear, and soft matter physics.

[36]  Charles M. C. Lee,et al.  Inferring Trade Direction from Intraday Data , 1991 .

[37]  Yazhen Wang.  Jump and sharp cusp detection by wavelets , 1995 .

[38]  David S. Bates.  Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options , 1998 .

[39]  Gurdip Bakshi,et al.  Empirical Performance of Alternative Option Pricing Models , 1997 .

[40]  Maureen O'Hara,et al.  PRICE, TRADE SIZE, AND INFORMATION IN SECURITIES MARKETS* , 1987 .

[41]  P. Mykland,et al.  Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics , 2008 .

[42]  N. Shephard,et al.  Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation , 2005 .

[43]  Christophe Croux,et al.  Robust Estimation of Intraweek Periodicity in Volatility and Jump Detection , 2008 .

[44]  Ashish Tiwari,et al.  Quote Setting and Price Formation in an Order Driven Market , 1999 .

[45]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[46]  Jun Pan.  The jump-risk premia implicit in options: evidence from an integrated time-series study $ , 2002 .

[47]  Tim Bollerslev,et al.  Roughing it Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility , 2007 .

[48]  Luca Benzoni,et al.  An Empirical Investigation of Continuous-Time Equity Return Models , 2001 .

[49]  Charles M. C. Lee,et al.  Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis , 1993 .

[50]  David S. Bates.  Post-'87 crash fears in the S&P 500 futures option market , 2000 .

[51]  The jump component of S&P 500 volatility and the VIX index , 2009 .

[52]  Suzanne S. Lee,et al.  Jumps and Information Flow in Financial Markets , 2011 .

[53]  Jun Pan.  The jump-risk premia implicit in options: evidence from an integrated time-series study , 2001 .

[54]  Elizabeth R. Odders-White,et al.  On the occurrence and consequences of inaccurate trade classification , 2000 .

[55]  S. Manganelli.  Duration, Volume and Volatility Impact of Trades , 2002, SSRN Electronic Journal.

[56]  Jun Pan,et al.  Analytical value-at-risk with jumps and credit risk , 2001, Finance Stochastics.

[57]  N. Shephard,et al.  Power and bipower variation with stochastic volatility and jumps , 2003 .

[58]  Jonathan H. Wright,et al.  Bond Risk Premia and Realized Jump Risk , 2009 .

[59]  Telling from Discrete Data Whether the Underlying Continuous-Time Model is a Diffusion , 2002 .