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The Liquidity On The Market Governed By Orders

Author

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  • Bogdan Negrea

    (Academy of Economic Studies, Bucharest)

Abstract

This paper proposes a new method based on stochastic calculus in order to analyze the liquidity on the market governed by orders in the presence of the informed agents. The paper proposes a new formula in order to compute the market liquidity. This analytical formula is obtained from the options valuation methods following the fact that an agent who places a limit order offers an option to the rest of the market which can be exercised against him. The analytical formula of the liquidity cost for a market governed by orders depends on four parameters: the risk-free interest rate, the transaction price of the financial asset, the volatility of the financial asset and the limit price.

Suggested Citation

  • Bogdan Negrea, 2008. "The Liquidity On The Market Governed By Orders," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 12(12(517)(s), pages 24-30, December.
  • Handle: RePEc:agr:journl:v:12(517)(supplement):y:2008:i:12(517)(supplement):p:24-30
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