Unscheduled News and Market Dynamics

Upon unscheduled news arrivals, investors react with a stochastic delay and possibly take advantage of new information. In this context, I study the equilibrium dynamics of limit order markets. Idiosyncratic liquidity shocks occur continuously while news arrives at a random time. Competition for accommodating next instant liquidity needs pushes the bid-ask spread down to the tick. Following news, order flows become imbalanced and market depth is consumed, yielding positive correlations between price volatility, trading volume and order flow imbalances. Holding expected price volatility constant, the news arrival frequency negatively impacts the market depth and the trading volume/volatility covariance.