How do Extreme Price Movements End?

52 Pages Posted: 14 Nov 2020

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Konstantin Sokolov

University of Memphis - Fogelman College of Business and Economics

Jiang Zhang

University of Virginia - Darden School of Business

Date Written: September 26, 2020

Abstract

We test competing theories on liquidity dynamics during extreme price movements (EPMs). Our findings indicate that market makers strategically allow for price pressures and earn compensation from pricing errors. As a result, liquidity provision intensifies towards the end of an average EPM. This goes counter to a widespread concern that market making constraints cause the deterioration of liquidity as EPMs develop. Finally, we demonstrate that limit order book dynamics during EPMs is in line with a socially beneficial equilibrium.

Keywords: extreme price movements, price pressures, strategic liquidity provision

JEL Classification: G10, G14

Suggested Citation

Brogaard, Jonathan and Sokolov, Konstantin and Zhang, Jiang, How do Extreme Price Movements End? (September 26, 2020). Available at SSRN: https://ssrn.com/abstract=3700218 or http://dx.doi.org/10.2139/ssrn.3700218

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Konstantin Sokolov (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Jiang Zhang

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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