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Search Costs and Investor Trading Activity: Evidence from Limit Order Books

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  • William T. Lin
  • Shih-Chuan Tsai
  • David S. Sun

Abstract

In this study, we analyze investor trading behavior based not on information-related assumptions but on the search model of Vayanos and Wang (2007). Our study shows that search cost dictates trading polarization across investors, firm size, and time of day. We find that individual investors prefer to trade at market open, while institutional investors trade more heavily near market close. Trading costs indicate that it is less costly for institutional investors to trade large cap stocks at market close than at open. Search cost is related significantly to order-based market liquidity measures depending on time of day, market capitalizations, and investor type.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 48 (2012)
Issue (Month): 3 (May)
Pages: 4-30

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Handle: RePEc:mes:emfitr:v:48:y:2012:i:3:p:4-30

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

Related research

Keywords: execution cost; limit order book; liquidity; market depth; search model;

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References

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  1. Dimitri Vayanos & Pierre-Olivier Weill, 2005. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics 459, London School of Economics and Political Science, LSE Library.
  2. Vayanos, Dimitri & Wang, Tan, 2007. "Search and endogenous concentration of liquidity in asset markets," Journal of Economic Theory, Elsevier, vol. 136(1), pages 66-104, September.
  3. FOUCAULT, Thierry & KADAN, Ohad & KANDEL, Eugene, 2001. "Limit order book as a market for liquidity," Les Cahiers de Recherche 728, HEC Paris.
  4. Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, vol. 55(5), pages 2117-2155, October.
  5. Hu, Shing-yang, 2006. "A simple estimate of noise and its determinant in a call auction market," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 348-362.
  6. Michael D. McKenzie, 2007. "Technical Trading Rules in Emerging Markets and the 1997 Asian Currency Crises," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(4), pages 46-73, August.
  7. Daniel Dorn & Gur Huberman & Paul Sengmueller, 2005. "Correlated Trading and Returns," DNB Working Papers 072, Netherlands Central Bank, Research Department.
  8. Chan, Kalok & Menkveld, Albert J. & Yang, Zhishu, 2007. "The informativeness of domestic and foreign investors' stock trades: Evidence from the perfectly segmented Chinese market," Journal of Financial Markets, Elsevier, vol. 10(4), pages 391-415, November.
  9. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Lokman Gündüz & Abdulnasser Hatemi-J, 2005. "Stock Price and Volume Relation in Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 41(1), pages 29-44, January.
  11. G. Mujtaba Mian & Christopher Adam, 2001. "Volatility dynamics in high frequency financial data: an empirical investigation of the Australian equity returns," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 341-352.
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