Intraday Jump Dynamics: What Predicts Price Jumps?

Abstract

This paper examines the relationship between liquidity fragmentation and price jumps. Unexpected changes in intraday liquidity fragmentation predict jumps and jump direction. A shock to ask (bid) side liquidity fragmentation increases the probability of positive (negative) jumps by 36%. Decomposing jumps into information and noise components we show that fragmented jumps are noisier. Our work suggests that liquidity suppliers predict jumps and actively manage their exposure to large order imbalances accompanying jumps by fragmenting liquidity. This makes jumps predictable as liquidity suppliers' information is reflected in liquidity fragmentation, minutes before the arrival of a jump.

Keywords: jumps, price efficiency, high frequency price discovery, market liquidity

JEL Classification: G14, G12