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Liquidity Trading in Market Microstructure Theory

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  • Ramanlal, Pradipkumar

Abstract

Liquidity trading is an important component of market microstructure models. In most cases, its role is primarily to ensure existence of equilibrium and therefore that trading occurs among asymmetrically informed agents. While most market microstructure models allege that agents trade based upon rational expectations, the rationality of the type of liquidity trading assumed in these models remains to be verified. Specifically, liquidity traders are often assumed to submit price-inelastic orders for reasons exogenous to the model at hand. But whether price-inelastic trading is consistent with rational utility maximizing behavior remains to be shown. Copyright 1999 by Kluwer Academic Publishers

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  • Ramanlal, Pradipkumar, 1999. "Liquidity Trading in Market Microstructure Theory," Review of Quantitative Finance and Accounting, Springer, vol. 13(1), pages 29-38, July.
  • Handle: RePEc:kap:rqfnac:v:13:y:1999:i:1:p:29-38
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    Cited by:

    1. LUKIĆ Radojko, 2023. "Influence of Net Working Capital on Trade Profitability in Serbia," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.

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