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.

Management Science
Department of Finance

Bongaerts, D.G.J, van Dijk, M.A., Yuferova, D, Rosch, D.M., & Roll, R. (2020). How do shocks arise and spread across stock markets? A microstructure perspective. Management Science, forthcomin. Retrieved from http://hdl.handle.net/1765/133155