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Market versus Limit Orders in an Imperfectly Competitive Security

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Author Info
Luís A. Medrano
Abstract

This paper analyzes the choice between limit and market orders in an imperfectly competitive noisy rational expectations economy. There is a unique insider, who takes into account the effect their trading has on prices. If the insider behaves as a price taker, she will choose market orders if her private information is very precise and she will choose limit orders otherwise. On the contrary, if the insider recognizes and exploits her ability to affect the market price, her optimal choice is to place limit orders whatever the precision of her private information.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/165.pdf
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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 165.

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Date of creation: Feb 1996
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Handle: RePEc:upf:upfgen:165

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Market microstructure; limit orders; market orders; insider trading; market making; strategic behavior; rational expectations;

Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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This page was last updated on 2009-12-18.

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