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Are Limit Orders Rational?

Author

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  • Martin Šmíd

Abstract

We examine whether it is rational to put limit orders in a limit order market. We find that limit orders are not needed and may be even disadvantageous given that the agent trades on-line. Further, we present a numerical study indicating that putting limit orders may be optimal given that the agent trades at discrete times but the benefit from using them in comparison with immediate buying and selling is negligible.

Suggested Citation

  • Martin Šmíd, 2007. "Are Limit Orders Rational?," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2007(4), pages 32-38.
  • Handle: RePEc:prg:jnlaop:v:2007:y:2007:i:4:id:71:p:32-38
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    References listed on IDEAS

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    1. Alexandre Mathis, 2004. "VAT indicators," Taxation Papers 2, Directorate General Taxation and Customs Union, European Commission, revised Apr 2004.
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    Cited by:

    1. Kühn, Christoph & Stroh, Maximilian, 2013. "Continuous time trading of a small investor in a limit order market," Stochastic Processes and their Applications, Elsevier, vol. 123(6), pages 2011-2053.

    More about this item

    Keywords

    market microstructure; limit order market; portfolio selection;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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