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

forthcoming in Management Science

66 Pages Posted: 4 Aug 2014 Last revised: 1 Mar 2021

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Richard Roll

California Institute of Technology

Dominik Rösch

State University of New York at Buffalo - School of Management; Erasmus University - Rotterdam School of Management

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Darya Yuferova

Norwegian School of Economics (NHH) - Department of Finance

Date Written: February 28, 2021

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: Equity markets, jumps, financial crises, contagion, liquidity, trading activity

JEL Classification: G12, G15

Suggested Citation

Bongaerts, Dion and Roll, Richard W. and Rösch, Dominik and Van Dijk, Mathijs A. and Yuferova, Darya, How Do Shocks Arise and Spread Across Stock Markets? A Microstructure Perspective (February 28, 2021). forthcoming in Management Science, Available at SSRN: https://ssrn.com/abstract=2475518 or http://dx.doi.org/10.2139/ssrn.2475518

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Dominik Rösch

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Darya Yuferova (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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