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Liquidity Shocks and Order Book Dynamics

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  • Bruno Biais
  • Pierre-Olivier Weill

Abstract

We propose a dynamic competitive equilibrium model of limit order trading, based on the premise that investors cannot monitor markets continuously. We study how limit order markets absorb transient liquidity shocks, which occur when a significant fraction of investors lose their willingness and ability to hold assets. We characterize the equilibrium dynamics of market prices, bid-ask spreads, order submissions and cancelations, as well as the volume and limit order book depth they generate.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15009.

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Date of creation: May 2009
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Handle: RePEc:nbr:nberwo:15009

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  1. Mikhail Golosov & Aleh Tsyvinski & Guido Lorenzoni, 2008. "Decentralized trading with private information," 2008 Meeting Papers 391, Society for Economic Dynamics.
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  25. 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.
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  27. Greenwood, Robin, 2005. "Short- and long-term demand curves for stocks: theory and evidence on the dynamics of arbitrage," Journal of Financial Economics, Elsevier, vol. 75(3), pages 607-649, March.
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  29. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, 02.
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Cited by:
  1. Pierre-Olivier Weill & Bruno Biais, 2009. "Liquidity shocks and order book dynamics," 2009 Meeting Papers 89, Society for Economic Dynamics.
  2. Samuel N. Cohen & Lukasz Szpruch, 2011. "A limit order book model for latency arbitrage," Papers 1110.4811, arXiv.org.

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