Liquidity shocks and intraday price reaction

Abstract

Using a global sample of high-frequency data, I investigate how liquidity shocks affect intraday price movements. I find a negative association between liquidity shocks and price impact. This finding remains robust after considering the exogeneity of liquidity shocks, using alternative windows to measure liquidity shocks, and controlling for volume shocks and volatility shocks. Additional tests show that the documented relation stems from idiosyncratic shocks and sell-order shocks. Moreover, I find that liquidity shocks are likely driven by uninformed traders. My evidence suggests that the market requires 30 min to accomplish price adjustments when meeting liquidity shocks.