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What really causes large price changes?

Abstract:

We study the cause of large fluctuations in prices in the London Stock Exchange. This is done at the microscopic level of individual events, where an event is the placement or cancellation of an order to buy or sell. We show that price fluctuations caused by individual market orders are essentially independent of the volume of orders. Instead, large price fluctuations are driven by liquidity fluctuations, variations in the market's ability to absorb new orders. Even for the most liquid stocks...

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Institution:
University of Oxford
Department:
Oxford, MPLS, Mathematical Inst
Gillemot, L More by this author
Publication date:
2003-12-30
URN:
uuid:970adca8-25aa-4147-90c1-ecf3e4e833a1
Source identifiers:
387688
Local pid:
pubs:387688

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