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Public information arrival: Price discovery and liquidity in electronic limit order markets

Author

Listed:
  • Riordan, Ryan
  • Storkenmaier, Andreas
  • Wagener, Martin
  • Sarah Zhang, S.

Abstract

How information is translated into market prices is still an open question. This paper studies the impact of newswire messages on intraday price discovery, liquidity, and trading intensity in an electronic limit order market. We take an objective ex ante measure of the tone of a message to study the impacts of positive, negative, and neutral messages on price discovery and trading activity. As expected, we find higher adverse selection costs around the arrival of newswire messages. Negative messages are associated with higher adverse selection costs than positive or neutral messages. Liquidity increases around positive and neutral messages and decreases around negative messages. Available order book depth as well as the trading intensity increases around all news. Our results suggest that market participants possess different information gathering and processing capabilities and that negative news messages are particularly informative and induce stronger market reactions.

Suggested Citation

  • Riordan, Ryan & Storkenmaier, Andreas & Wagener, Martin & Sarah Zhang, S., 2013. "Public information arrival: Price discovery and liquidity in electronic limit order markets," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1148-1159.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:4:p:1148-1159
    DOI: 10.1016/j.jbankfin.2012.11.008
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Adam Clements & Neda Todorova, 2014. "The impact of information flow and trading activity on gold and oil futures volatility," NCER Working Paper Series 102, National Centre for Econometric Research.
    2. Keim, Donald B & Massa, Massimo & von Beschwitz, Bastian, 2015. "First to “Read” the News: News Analytics and Institutional Trading," CEPR Discussion Papers 10534, C.E.P.R. Discussion Papers.
    3. Mizrach, Bruce & Otsubo, Yoichi, 2014. "The market microstructure of the European climate exchange," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 107-116.
    4. Sankaraguruswamy, Srinivasan & Shen, Jianfeng & Yamada, Takeshi, 2013. "The relationship between the frequency of news release and the information asymmetry: The role of uninformed trading," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4134-4143.
    5. Smales, Lee A., 2016. "News sentiment and bank credit risk," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 37-61.
    6. repec:eee:riibaf:v:42:y:2017:i:c:p:9-30 is not listed on IDEAS
    7. Smales, Lee A. & Yang, Yi, 2015. "The importance of belief dispersion in the response of gold futures to macroeconomic announcements," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 292-302.
    8. Stephan Meyer & Sebastian Schroff & Christof Weinhardt, 2014. "(Un)skilled leveraged trading of retail investors," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(2), pages 111-138, May.
    9. Ülkü, Numan & Weber, Enzo, 2013. "Identifying the interaction between stock market returns and trading flows of investor types: Looking into the day using daily data," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2733-2749.
    10. Araújo, Gustavo Silva & Barbedo, Claudio Henrique da S. & Vicente, José Valentim M., 2014. "The adverse selection cost component of the spread of Brazilian stocks," Emerging Markets Review, Elsevier, vol. 21(C), pages 21-41.
    11. repec:eee:ecolet:v:159:y:2017:i:c:p:65-68 is not listed on IDEAS
    12. repec:eee:finlet:v:21:y:2017:i:c:p:264-271 is not listed on IDEAS
    13. repec:gam:jecnmx:v:5:y:2017:i:3:p:35-:d:108901 is not listed on IDEAS
    14. Adam Clements & Yin Liao, "undated". "News and network structures in equity market volatility," NCER Working Paper Series 110, National Centre for Econometric Research.
    15. repec:eee:ecofin:v:42:y:2017:i:c:p:172-192 is not listed on IDEAS
    16. Efstathios Panayi & Gareth Peters & Ioannis Kosmidis, 2014. "Liquidity commonality does not imply liquidity resilience commonality: A functional characterisation for ultra-high frequency cross-sectional LOB data," Papers 1406.5486, arXiv.org.
    17. Smales, Lee A., 2015. "Time-variation in the impact of news sentiment," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 40-50.
    18. Smales, Lee A., 2015. "Asymmetric volatility response to news sentiment in gold futures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 161-172.
    19. Adam Clements & Joanne Fuller & Vasilios Papalexiou, 2015. "Public news flow in intraday component models for trading activity and volatility," NCER Working Paper Series 106, National Centre for Econometric Research.
    20. Smales, Lee A., 2014. "News sentiment in the gold futures market," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 275-286.
    21. repec:eee:jimfin:v:79:y:2017:i:c:p:232-254 is not listed on IDEAS
    22. Joseph, Kishore & Garcia, Philip, 2016. "Intraday Market Effects in Electronic Soybean Futures Market during Non-Trading and Trading Hour Announcements," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235772, Agricultural and Applied Economics Association.
    23. Jieun Lee & Doojin Ryu & Ali M. Kutan, 2016. "Monetary Policy Announcements, Communication, and Stock Market Liquidity," Australian Economic Papers, Wiley Blackwell, vol. 55(3), pages 227-250, September.

    More about this item

    Keywords

    Information; Liquidity; Price discovery; News; Limit order markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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