| Abstract: |
We study intraday jumps on a pure limit order FX market by linking them to
news announcements and liquidity shocks. First, we show that jumps are
frequent and contribute greatly to the return volatility. Nearly half of the
jumps can be linked with scheduled and unscheduled news announcements.
Furthermore, we show that jumps are information based, whether they are linked
with news announcements or not. Prior to jumps, liquidity does not deviate
from its normal level, nor do liquidity shocks offer any predictive power for
jump occurrence. Jumps emerge not as a result of unusually low liquidity but
rather as a result of an unusually high demand for immediacy concentrated on
one side of the book. During and after the jump, a dynamic order placement
process emerges: some participants endogenously become liquidity providers and
absorb the increased demand for immediacy. We detect an interesting asymmetry
and find the liquidity providers to be more reluctant to add liquidity when
confronted with a news announcement around the jump. Further evidence shows
that participants submit more limit orders relative to market orders after a
jump. Consequently, the informational role of order flow becomes less
pronounced in the thick order book after the jump. |