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Learning and Information Dissemination in Limit Order Markets

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What can traders learn and how does learning affect the market? When information is asymmetric, short-lived, and uninformed traders learn, we present an artificial limit order market model to examine the effect of learning, information value, and order aggressiveness on information dissemination efficiency, bid-ask spread, order submission, and order profit of traders. We find that learning helps the uninformed traders to acquire private information more effectively and hence improves market information dissemination. Also the informed traders in general consume liquidity while the uninformed traders mainly supply liquidity. More interestingly, due to the learning and short-lived information, the bid-ask spread and its volatility are positively related to the probability of informed trading. The results help us to understand the behavior of uninformed traders and provide substantial insight and intuition into the trading process.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp333.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 333.

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Length: 39 pages
Date of creation: 01 Jun 2013
Date of revision:
Handle: RePEc:uts:rpaper:333

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Keywords: Limit order book; continuous double auction; learning; information dissemination; order aggressiveness; bid-ask spread;

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