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Search costs and investor trading activity: evidences from limit order book

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  • Lin, William
  • Tsai, Shih-Chuan
  • Sun, David

Abstract

We analyze in this study 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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File URL: http://mpra.ub.uni-muenchen.de/37284/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37284.

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Date of creation: Aug 2010
Date of revision: Aug 2011
Handle: RePEc:pra:mprapa:37284

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

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  1. 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, Taylor & Francis Journals, vol. 11(3), pages 341-352.
  2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2003. "Limit Order Book as a Market for Liquidity," Discussion Paper Series, The Center for the Study of Rationality, Hebrew University, Jerusalem dp321, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  3. Lokman Gündüz & Abdulnasser Hatemi-J, 2005. "Stock Price and Volume Relation in Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 41(1), pages 29-44, January.
  4. 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., M.E. Sharpe, Inc., vol. 43(4), pages 46-73, August.
  5. Daniel Dorn & Gur Huberman & Paul Sengmueller, 2008. "Correlated Trading and Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 63(2), pages 885-920, 04.
  6. Dimitri Vayanos & Pierre-Olivier Weill, 2007. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24474, London School of Economics and Political Science, LSE Library.
  7. Dmitrios Vayanos, 2004. "Search and Endogenous Concentration of Liquidity in Asset Markets," Econometric Society 2004 North American Winter Meetings, Econometric Society 647, Econometric Society.
  8. Hu, Shing-yang, 2006. "A simple estimate of noise and its determinant in a call auction market," International Review of Financial Analysis, Elsevier, Elsevier, vol. 15(4-5), pages 348-362.
  9. 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, Elsevier, vol. 10(4), pages 391-415, November.
  10. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 2117-2155, October.
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