Market Quality Breakdowns in Equities

Cheng Gao and Bruce Mizrach
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Cheng Gao: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: A breakdown in market quality occurs when an order book thins to the point where extreme price movements are observed. These are frequently reversed as the market learns that nothing fundamental has occurred. The daily average breakdown frequency from 1993-2011 is 0.64%, with averages in 2010-11 below this amount. Controlling for microstructure effects, breakdowns have fallen significantly since Reg NMS. Spikes in market correlation and high frequency trading surges make breakdowns more likely. ETFs break down more often than non-ETFs. Both ETFs and high frequency trading Granger cause market correlation. Breakdowns are predictable for up to two days.

Keywords: market quality; breakdown; ETF; correlation (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2013-07-16
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (1)

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Journal Article: Market quality breakdowns in equities (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:201318

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