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Abstract
We analyse large stock price changes of more than five standard deviations for (i) TAQ data for the year 1997 and (ii) order book data from the Island ECN for the year 2002. We argue that a large trading volume alone is not a sufficient explanation for large price changes. Instead, we find that a low density of limit orders in the order book, i.e. a small liquidity, is a necessary prerequisite for the occurrence of extreme price fluctuations. Taking into account both order flow and liquidity, large stock price fluctuations can be explained quantitatively.
Notes
†We analysed the following companies (ticker symbols): AMAT, BRCD, BRCM, CSCO, INTC, KLAC, MSFT, ORCL, QLGC, SEBL.
†We do not include market orders executing ‘hidden’ limit orders in the definition of Q(t) as we want to make a comparison with the order book containing ‘visible’ orders only.
†We analysed the following companies (ticker symbols): AMAT, BRCD, BRCM, CSCO, INTC, KLAC, MSFT, ORCL, QLGC, SEBL.
†We tested for each time interval with price change larger than 5σ
G
for nonlinearities. As a simple descriptive method we fitted these curves with power laws. The exponents we found vary between 0.15 and 2.35 with a mean of 1.32 and they scatter with a standard deviation of 0.41. On the other hand, a power law fit to the average of I
actual for all such events yields an exponent of 1.03, which is approximately linear.
