Intraday Jump Dynamics: What Predicts Price Jumps?

Abstract

This paper examines the relationship between liquidity dynamics in lit exchanges—specifically fragmentation and consolidated depth—and stock price jumps for the sample of S&P 500 stocks. Using a stylized model, we posit that liquidity suppliers fragment offered liquidity and reduce depth to manage risk from latency arbitrage during days with high expected jump intensity (anticipated jumps). In line with our model's predictions, jump counts are 58% larger when fragmentation increases from its 10th to 90th percentile value, while a decrease in consolidated depth from its 90th to 10th percentile is associated with an increase of 15% in jump counts.

Keywords: Jumps, Fragmentation, Liquidity, Latency Arbitrage

JEL Classification: G10, G14, G17, G19