On the Origination and Propagation of Shocks Across International Equity Markets: A Microstructure Perspective

Abstract

We study intraday, market-wide shocks to stock prices, market liquidity, and trading activity on international equity markets and test recent theories on “endogenous liquidity” effects. Shocks to prices are prevalent and large, with rapid spillovers across markets. Price shocks appear to be predominantly driven by information; they do not revert and are often associated with macroeconomic news. Liquidity shocks are typically isolated and temporary. There is little evidence that liquidity effects exacerbate price shocks or foment non-fundamental contagion. The results cast doubt on the notion that liquidity has a central role in the origination and propagation of financial market upheavals.

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

JEL Classification: G12, G15