Market Quality Breakdowns in Equities
41 Pages Posted: 29 Sep 2012 Last revised: 20 Dec 2015
Date Written: December 18, 2015
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: Suggested Citation