How Do Shocks Arise and Spread Across Stock Markets? A Microstructure Perspective

We study intraday, market-wide shocks to stock prices, market liquidity, and trading activity on international markets assess the relevance of recent theories “liquidity dry-ups” in explaining such shocks. Market-wide price are prevalent large, with rapid spillovers across markets. However, predominantly driven by information; they do not revert often associated macroeconomic news. Furthermore, liquidity typically isolated transitory. Overall, we find little evidence for effects fomenting or non-fundamental contagion, nor alternative explanations. dry-ups thus concern investors. This paper was accepted Karl Diether, finance.