Saad Ali Khan, HEC Montréal

Fri. Nov. 22 02:30 PM - Fri. Nov. 22 04:00 PM
Location: 4BC58

“Fragmented Liquidity and Predictable Jumps”

Abstract: Price jumps are predictable using simple order book depth statistics. We examine the relationship between liquidity fragmentation, consolidated depth, and stock price jumps for S&P 500 stocks. Using a stylized model, we posit that liquidity suppliers fragment offered liquidity and reduce depth to manage risk from arbitrage during days with high expected jump intensity. In line with our model's predictions we find 80% more jumps when fragmentation increases from the 10th to the 90th percentile, while a decrease in consolidated depth from the 90th to the 10th percentile is associated with 19% more jumps.