Informed traders and limit order markets
AbstractWe consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit. We numerically solve for the equilibrium and demonstrate that the market is a "volatility multiplier": prices are more volatile than the fundamental value of the asset. This effect increases when the fundamental value has high volatility and with asymmetric information across traders. Changes in the microstructure noise are negatively correlated with changes in the estimated fundamental value, implying that asset betas estimated from high-frequency data will be incorrect.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 93 (2009)
Issue (Month): 1 (July)
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Web page: http://www.elsevier.com/locate/inca/505576
Limit order market Informed traders Endogenous information acquisition Computational game;
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