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Understanding limit order book depth: conditioning on trade informativeness

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Author Info
Helena Beltran
Albert J. Menkveld

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Abstract

We study how a limit order book reacts to informed trades and adverse selection. We estimate Sandas'(2001) version of the classical Glosten (1994) order book model and accept it, but only for the first two prices displayed on each side of the book. We then relax one of the assumption and allow the level of private information in market orders to be stochastic. By conditioning on the information level, we find support for deeper order books, larger market orders and shorter inter-trade durations at times of relatively uninformative market orders, which is consistent with liquidity traders concentrating their orders at uninformative times.

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 142.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:142

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Related research
Keywords: Order book; liquidity; trade informativeness;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  1. Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April. [Downloadable!] (restricted)
  2. Sandas, Patrik, 2001. "Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(3), pages 705-34.
  3. Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August. [Downloadable!] (restricted)
  4. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May. [Downloadable!] (restricted)
  5. Christine A. Parlour & Duane J. Seppi, 2003. "Liquidity-Based Competition for Order Flow," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(2), pages 301-343. [Downloadable!] (restricted)
  6. Michael A. Goldstein & Kenneth A. Kavajecz, . "Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE," Rodney L. White Center for Financial Research Working Papers 14-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  7. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-89, December. [Downloadable!] (restricted)
  8. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
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  9. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 103-50.
  10. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 789-816.
  11. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
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  12. Burton Hollifield & Robert A. Miller & Patrik Sandas, 2004. "Empirical Analysis of Limit Order Markets," Review of Economic Studies, Blackwell Publishing, vol. 71(4), pages 1027-1063, October. [Downloadable!] (restricted)
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  13. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1035-64.
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  14. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January. [Downloadable!] (restricted)
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