Large price changes on small scales

TL;DR

This paper investigates the dynamics of prices, volume, and bid-ask spreads following extreme short-term price changes on NYSE and NASDAQ, revealing behavioral overreactions and specific decay patterns in volatility.

Contribution

It provides new insights into the post-event behavior of financial variables and characterizes the decay of volatility after large intraday price jumps.

Findings

Volatility decays as a power law with an exponent of about 0.4.

Strong behavioral overreaction observed after extreme price changes.

Price and volume dynamics show significant deviations from normal conditions.

Abstract

In this study we examine the evolution of price, volume, and the bid-ask spread after extreme 15 minute intraday price changes on the NYSE and the NASDAQ. We find that due to strong behavioral trading there is an overreaction. Furthermore we find that volatility which increases sharply at the event decays according to a power law with an exponent of approximately 0.4, i.e., much faster than the autocorrelation function of volatility.