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News, Liquidity Dynamics and Intraday Jumps: Evidence from the HUF/EUR market

Listed author(s):
  • M. FRÖMMEL

    ()

  • X. HAN

    ()

  • F. VAN GYSEGEM

    ()

We study intraday jumps on a pure limit order FX market by linking them to news announcements and liquidity shocks. First, we show that jumps are frequent and contribute greatly to the return volatility. Nearly half of the jumps can be linked with scheduled and unscheduled news announcements. Furthermore, we show that jumps are information based, whether they are linked with news announcements or not. Prior to jumps, liquidity does not deviate from its normal level, nor do liquidity shocks offer any predictive power for jump occurrence. Jumps emerge not as a result of unusually low liquidity but rather as a result of an unusually high demand for immediacy concentrated on one side of the book. During and after the jump, a dynamic order placement process emerges: some participants endogenously become liquidity providers and absorb the increased demand for immediacy. We detect an interesting asymmetry and find the liquidity providers to be more reluctant to add liquidity when confronted with a news announcement around the jump. Further evidence shows that participants submit more limit orders relative to market orders after a jump. Consequently, the informational role of order flow becomes less pronounced in the thick order book after the jump.

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File URL: http://wps-feb.ugent.be/Papers/wp_13_848.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 13/848.

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Length: 51 pages
Date of creation: Aug 2013
Handle: RePEc:rug:rugwps:13/848
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  1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
  2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
  3. Xin Huang & George Tauchen, 2005. "The Relative Contribution of Jumps to Total Price Variance," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 456-499.
  4. Jiang, George J. & Lo, Ingrid & Verdelhan, Adrien, 2011. "Information Shocks, Liquidity Shocks, Jumps, and Price Discovery: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(02), pages 527-551, April.
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