What really causes large price changes?

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dc.creatorFarmer, J. Doyne
dc.creatorGillemot, Laszlo
dc.creatorLillo, Fabrizio
dc.creatorMike, Szabolcs
dc.creatorSen, Anindya
dc.date2003-12-30
dc.date2004-04-15
dc.date.accessioned2026-07-07T12:06:52Z
dc.date.available2026-07-07T12:06:52Z
dc.descriptionWe study the cause of large fluctuations in prices in the London Stock Exchange. This is done at the microscopic level of individual events, where an event is the placement or cancellation of an order to buy or sell. We show that price fluctuations caused by individual market orders are essentially independent of the volume of orders. Instead, large price fluctuations are driven by liquidity fluctuations, variations in the market's ability to absorb new orders. Even for the most liquid stocks there can be substantial gaps in the order book, corresponding to a block of adjacent price levels containing no quotes. When such a gap exists next to the best price, a new order can remove the best quote, triggering a large midpoint price change. Thus, the distribution of large price changes merely reflects the distribution of gaps in the limit order book. This is a finite size effect, caused by the granularity of order flow: In a market where participants placed many small orders uniformly across prices, such large price fluctuations would not happen. We show that this explains price fluctuations on longer timescales. In addition, we present results suggesting that the risk profile varies from stock to stock, and is not universal: lightly traded stocks tend to have more extreme risks.
dc.description14 pages, 12 figures
dc.identifierhttps://arxiv.org/abs/cond-mat/0312703
dc.identifierhttp://arxiv.org/abs/cond-mat/0312703
dc.identifier.urihttp://salesiana.dossiersoluciones.com/handle/123456789/208780
dc.subjectOther Condensed Matter
dc.subjectTrading and Market Microstructure
dc.titleWhat really causes large price changes?
dc.typetext

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