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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. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
  2. 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.
  3. Pierre-Olivier Weill & Dimitri Vayanos, 2005. "A Search-Based Theory of the On-the-Run Phenomenon," 2005 Meeting Papers 701, Society for Economic Dynamics.
  4. Daniel Dorn & Gur Huberman & Paul Sengmueller, 2005. "Correlated Trading and Returns," DNB Working Papers 072, Netherlands Central Bank, Research Department.
  5. 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.
  6. 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.
  7. 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.
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