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Determining the information share of liquidity and order flows in extreme price movements

Author

Listed:
  • Wu, Liang
  • Liu, Hengzhi
  • Liu, Chang
  • Long, Yunshen

Abstract

Liquidity and order flows have been found to be major causes of extreme price movements (EPMs) in previous studies. However, few studies have clarified whether the impacts of these factors to EPMs are transient or permanent. In this paper, we represent the fluctuation of liquidity as a time series of price. The measurement of permanent price impact is converted to the price discovery problem solved by a quantile vector error correction model. Empirical results using the high frequency data in the Chinese stock market indicate that both liquidity and order flows contribute to the permanent component of the EPMs. However, liquidity is the dominating factor, which accounts for more than 60–80% of the information share in EPMs scenarios.

Suggested Citation

  • Wu, Liang & Liu, Hengzhi & Liu, Chang & Long, Yunshen, 2020. "Determining the information share of liquidity and order flows in extreme price movements," Economic Modelling, Elsevier, vol. 93(C), pages 559-575.
    • Handle: RePEc:eee:ecmode:v:93:y:2020:i:c:p:559-575
    DOI: 10.1016/j.econmod.2020.09.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Extreme price movements; Price discovery; Information share; Liquidity;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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