The Propagation of Shocks Across International Equity Markets: A Microstructure Perspective

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We study the high-frequency proagation of shocks across international equity markets.  We identify shocks to stock prices, liquidity (quoted and effective spreads), and trading activity (turnover and order imbalance) for 12 equity markets around the world based on non-parametric jump statistics at the 5-minute frequency from 1996 to 2011.  Jumps in prices, quoted spreads, and order imbalance are prevalent and large, while jumps in effective spreads and turnover are rare.  Within a market, jumps in prices are regularly accompanied by jumps in order imbalance, but are independent of jumps in liquity.  Jumps in prices and co-jumps in prices and order imbalance are primarily driven by information rather than liquidity, since there is no subsequent price reversal and since they often occur around U.S. macroeconomic news announcements.  We also present evidence that jumps in prices and order imbalance (but not liquity) spillover across markets within the same 5-minute interval. Overall, we find that order imbalances help explain why shocks to stock prices occur and spread across markets, while shocks to liquity tend to be isolated events.

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