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Information Shocks and Liquidity Innovations

54 Pages Posted: 19 Jul 2017 Last revised: 10 Dec 2017

Will J. Armstrong

Texas Tech University - Area of Finance

Laura Cardella

Texas Tech University

Nasim Sabah

Texas Tech University - Area of Finance

Date Written: November 30, 2017

Abstract

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

Armstrong, Will J. and Cardella, Laura and Sabah, Nasim, Information Shocks and Liquidity Innovations (November 30, 2017). Available at SSRN: https://ssrn.com/abstract=3003385

Will Armstrong (Contact Author)

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

Laura Cardella

Texas Tech University ( email )

Lubbock, TX 79409
United States

Md Nasim-Us Sabah

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

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