Does News, Order Flow, or Illiquidity drive jumps in stock returns? In the day or in the night?
Abstract
We investigate how firm-level news, stock illiquidity, and order imbalances are reflected in stock return jumps and idiosyncratic jump risk. We analyze these relationships for the entire day as well as for the daytime and overnight trading periods. Our results show that information flows and trading frictions are significantly related to non-parametric measures of jump intensity and jump-size distributions and reveal variations over the trading day and across individual firms. Our analyses could enrich the economic content of models for stock return dynamics which typically have treated the sources of jumps as latent, and also help identify jumps due to information arrival as opposed to liquidity or strategic trading based on private information.