Market Quality Breakdowns in Equities

41 Pages Posted: 29 Sep 2012 Last revised: 20 Dec 2015

See all articles by Cheng Gao

Cheng Gao

Rutgers University, Department of Economics

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: December 18, 2015

Abstract

Breakdowns in market quality are extreme price movements that reverse once the market learns that nothing fundamental has occurred. The average daily breakdown frequency from 1993-2013 is 1.03%, with averages in 2010-2013 more than two-thirds lower at 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. In spite of market fragmentation, breakdowns and breakups have fallen significantly since Reg. NMS as multiple exchanges can provide liquidity. Spikes in market correlation make breakdowns and breakups more likely. Both ETFs and high frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.

Keywords: market quality, breakdown, breakups, correlation, high frequency trading

JEL Classification: G12, G14, G18

Suggested Citation

Gao, Cheng and Mizrach, Bruce, Market Quality Breakdowns in Equities (December 18, 2015). Available at SSRN: https://ssrn.com/abstract=2153909 or http://dx.doi.org/10.2139/ssrn.2153909

Cheng Gao

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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