Price jumps and liquidity dynamics: An intraday analysis

We presented recent research findings on the intraday dynamics of liquidty around price jumps. During the presentation (Powerpoint ), we described the intraday dynamics of liquidity around price jumps using the event study methodology and we identified the most relevant liquidity determinants of price jumps at the intra-day level.

Jumps were identified by applying the Lee and Mykland (2008) jump detection test, modified by Boudt, Croux and Laurent (2008) who take intraday volatility patterns into account. Our results showed that price jumps coincide with a significant increase in spreads. This negative liquidity effect is nevertheless dominated by a dramatic increase in the total number of shares traded, which is driven by a rise in both the number of transactions and the average trade size. Size at the Best Bid-Offer (BBO) displays a reversal pattern around price jumps, which may be explained by inventory imbalances. Most interestingly, market quality even seems to improve about 25 minutes after the occurrence of a jump. Although jumps are followed by a period of both higher spreads and volume, there seems to be a more short-lived rise in spreads than in volume. Finally, by regressing the log-transformed jump magnitude on liquidity variables, we show that the number of trades and order imbalance as the most important drivers of the size of price jumps.