Price Jumps and the Related Liquidity Dynamics : Evidences from Chinese Stock Market

Using 9559 single jumps detected from high frequency data of 220 individual stocks in SZ300P index, the paper investigates the liquidity dynamics around price jumps in Chinese market. By event study method and regression method, some interesting empirical results are obtained. The trading volumes at the price jumps are extraordinarily high, in particular at the positive price jumps, and the buyer-initiated trades contribute more to price volatilities. These may be associated with the high proportion of retail investors and their herding behavior for price chasing. Some evidences from the limit order book at jumps may reveal existence of plenty of informed trading, e.g., the order depth is quite large even 30 minutes before jumps, the occurrence of price jumps needs a quite thick limit order book, and price jumps consume the liquidity at a fast speed. The price reversal after price jumps is significant, and the volume and depth dynamics both contribute to the price reversal effect. Moreover, the size and direction of jumps are significantly correlated with the returns and trades in the post-jump trading time. The findings could be explained as the joint effect of herding behavior and informed trading. All these results may suggest that Chinese stock market need make a great effort to enforce its market discipline, and reform its trading regime