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Market instability and technical trading at high frequency: Evidence from NASDAQ stocks

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  • Erdemlioglu, Deniz
  • Petitjean, Mikael
  • Vargas, Nicolas

Abstract

The promotion of financial stability is the mission of central banks and market authorities. This mission is more difficult to accomplish when trading activity is associated with financial instability in the form of intraday price jumps. While the literature has widely shown that exogenous news releases trigger these jumps, very little is known about the consequences of endogenous technical trading on market instability. Using high-frequency 5-min data on 460 NASDAQ stocks from February to September 2017, we provide new evidence that sharp price movements during the day are also triggered by technical trading around special market configurations. When technical trading activity dominates, intraday price jumps are detected more frequently, and their direction becomes significantly predictable, particularly in small caps and in the energy sector. Our results support the view that the explanations for intraday market instability are not limited to news releases.

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  • Erdemlioglu, Deniz & Petitjean, Mikael & Vargas, Nicolas, 2021. "Market instability and technical trading at high frequency: Evidence from NASDAQ stocks," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001814
    DOI: 10.1016/j.econmod.2021.105592
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    More about this item

    Keywords

    Market instability; Jumps; Volatility; Trading signals; Technical analysis; High-frequency data; NASDAQ; Sectoral analysis; Small-cap stocks;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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