What really causes large price changes?

Fabrizio Lillo, J. Doyne Farmer, Anindya Sen, Anindya Sen, Fabrizio Lillo, László Gillemot, Szaboles Mike

Risultato della ricerca: Articlepeer review

175 Citazioni (Scopus)

Abstract

We study the cause of large fluctuations in prices on the London Stock Exchange. This is done at the microscopic level of individual events, where an event is the placement or cancellation of an order to buy or sell. We show that price fluctuations caused by individual market orders are essentially independent of the volume of orders. Instead, large price fluctuations are driven by liquidity fluctuations, variations in the market’s ability to absorb new orders. Even for the most liquid stocks there can be substantial gaps in the order book, corresponding to a block of adjacent price levels containing no quotes. When such a gap exists next to the best price, a new order can remove the best quote, triggering a large midpoint price change. Thus, the distribution of large price changes merely reflects the distribution of gaps in the limit order book. This is a finite size effect, caused by the granularity of order flow: in a market where participants place many small orders uniformly across prices, such large price fluctuations would not happen. We show that this also explains price fluctuations on longer timescales. In addition, we present results suggesting that the risk profile varies from stock to stock, and is not universal: lightly traded stocks tend to have more extreme risks.
Lingua originaleEnglish
pagine (da-a)383-397
Numero di pagine15
RivistaQuantitative Finance
Volume4
Stato di pubblicazionePublished - 2004

All Science Journal Classification (ASJC) codes

  • ???subjectarea.asjc.2000.2003???
  • ???subjectarea.asjc.2000.2000???

Fingerprint

Entra nei temi di ricerca di 'What really causes large price changes?'. Insieme formano una fingerprint unica.

Cita questo