Information Shocks and Liquidity Innovations
54 Pages Posted: 19 Jul 2017 Last revised: 10 Dec 2017
Date Written: November 30, 2017
We document that trading in response to a scheduled public information shock occurs in two stages, an information stage lasting roughly one-half second followed by a liquidity stage of five minutes or more. Our findings are consistent with traders initially competing to profit from short-term price movements, followed by a period of liquidity coordination as traders use the increased order flow to trade with minimal price impact. We also show that prices respond to negative news with a delay. The absence of trading frictions in the futures market, combined with high trading volume, suggests that short sale constraints may not be the only factor contributing to the asymmetric price response to news.
Keywords: Liquidity, information, informed trading, high-frequency trading, market microstructure, price impact, asymmetric price response
JEL Classification: G12, G13, G14, G23
Suggested Citation: Suggested Citation