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Cross-Asset Market Order Flow, Liquidity, and Price Discovery

Author

Listed:
  • Robert Garrison

    (Office of Financial Research)

  • Pankaj Jain

    (University of Memphis, Office of Financial Research)

  • Mark Paddrik

    (Office of Financial Research)

Abstract

Cross-asset market activity can be a channel through which illiquidity risks originating in one market can propagate to others. This paper examines the complex intra-day linkages between the U.S. equity securities market and the equity derivatives market using high-frequency data on S&P 500 index exchange-traded funds and E-mini futures contracts. The paper finds a positive, but short-lived, relationship between the two markets' order flow activities, which relates to the supply, demand, and withdrawal of liquidity between the two markets. The paper also finds that cross-asset market order flow is a key component of liquidity and price discovery, particularly during periods of market volatility.

Suggested Citation

  • Robert Garrison & Pankaj Jain & Mark Paddrik, 2019. "Cross-Asset Market Order Flow, Liquidity, and Price Discovery," Working Papers 19-04, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:19-04
    as

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    File URL: https://www.financialresearch.gov/working-papers/files/OFRwp-19_04_cross-asset-market-order-flow-liquidity-and-price-discovery.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    cross-market arbitrage; order flow; liquidity; market structure; automated markets;
    All these keywords.

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