How Do Shocks Arise and Spread Across Stock Markets? A Microstructure Perspective

Dion Bongaerts (), Richard Roll (), Dominik Rösch (), Mathijs van Dijk () and Darya Yuferova ()
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Dion Bongaerts: Finance Group, Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, Netherlands
Richard Roll: California Institute of Technology, Pasadena, California 91125
Dominik Rösch: State University of NewYork at Buffalo, Buffalo, New York 14260
Mathijs van Dijk: Finance Group, Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, Netherlands
Darya Yuferova: NHH Norwegian School of Economics, 5045 Bergen, Norway

Management Science, 2022, vol. 68, issue 4, 3071-3089

Abstract: We study intraday, market-wide shocks to stock prices, market liquidity, and trading activity on international stock markets and assess the relevance of recent theories on “liquidity dry-ups” in explaining such shocks. Market-wide price shocks are prevalent and large, with rapid spillovers across markets. However, price shocks are predominantly driven by information; they do not revert and are often associated with macroeconomic news. Furthermore, liquidity shocks are typically isolated and transitory. Overall, we find little evidence for liquidity effects fomenting price shocks or non-fundamental contagion, nor for alternative explanations. Market-wide liquidity dry-ups are thus of little concern to international investors.

Keywords: financial market shocks; liquidity dry-ups; spillovers across international stock markets; information; international diversification (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:4:p:3071-3089

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