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Market conditions and order-type preference

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  • Kalaitzoglou, Iordanis Angelos
  • Ibrahim, Boulis Maher

Abstract

This paper proposes a methodology to investigate the relative preference of limit orders when changes in market conditions lead to temporary violations of the zero-profit condition. We formulate this preference as a function of the intraday structural price components of information and liquidity, the time variation in which is driven by expectations of an expandable set of measures of time varying market conditions. This is then used to investigate when the equilibrium zero-profit condition might be violated, which would lead to a preference for a particular order type. The resulting theoretical and empirical predictions of advanced microstructural pricing models suggest that limit orders should be preferred during periods of intense market activity, such as periods of high volume and short duration, when the price components are positively correlated, and during periods of less intense activity when the components are negatively correlated.

Suggested Citation

  • Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2023. "Market conditions and order-type preference," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000753
    DOI: 10.1016/j.irfa.2023.102559
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Limit vs. market orders; Intraday volatility; Implied spread; Risk aversion;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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