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Information, Liquidity, and Dynamic Limit Order Markets

Author

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  • Roberto Riccò
  • Barbara Rindi
  • Duane J. Seppi

Abstract

This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. Investors condition on information in both the current limit order book and also, unlike in previous research, on the prior order history when deciding whether to provide or take liquidity. Our analysis shows that the information content of the prior order history can be substantial. Surprisingly, the information content of equilibrium orders can differ from order direction and aggressiveness. JEL classiffication: G10, G20, G24, D40. Keywords: Limit order markets, asymmetric information, liquidity, market microstructure.

Suggested Citation

  • Roberto Riccò & Barbara Rindi & Duane J. Seppi, 2020. "Information, Liquidity, and Dynamic Limit Order Markets," Working Papers 660, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:660
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    References listed on IDEAS

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    Cited by:

    1. Zhu, Hongyu & Yamamoto, Ryuichi, 2022. "Order submission, information asymmetry, and tick size," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    2. Ingrid M. Werner & Barbara Rindi & Sabrina Buti & Yuanji Wen, 2023. "Tick Size, Trading Strategies, and Market Quality," Management Science, INFORMS, vol. 69(7), pages 3818-3837, July.
    3. Bayona, Anna & Dumitrescu, Ariadna & Manzano, Carolina, 2023. "Information and optimal trading strategies with dark pools," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    limit order markets; asymmetric information; liquidity; market microstructure.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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