Stock price jumps: news and volume play a minor role

TL;DR

This study investigates the causes of stock price jumps, finding that news and volume have limited explanatory power, and suggesting that order flow fluctuations near liquidity gaps are primary drivers.

Contribution

It provides empirical evidence that neither news nor transaction volume significantly explain stock price jumps, highlighting the role of order flow fluctuations near liquidity shortages.

Findings

News and volume are weak predictors of price jumps.

Volatility patterns differ between jumps and news events.

Large transaction volumes are not the main cause of jumps.

Abstract

In order to understand the origin of stock price jumps, we cross-correlate high-frequency time series of stock returns with different news feeds. We find that neither idiosyncratic news nor market wide news can explain the frequency and amplitude of price jumps. We find that the volatility patterns around jumps and around news are quite different: jumps are followed by increased volatility, whereas news tend on average to be followed by lower volatility levels. The shape of the volatility relaxation is also markedly different in the two cases. Finally, we provide direct evidence that large transaction volumes are_not_ responsible for large price jumps. We conjecture that most price jumps are induced by order flow fluctuations close to the point of vanishing liquidity.