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How to Compute the Liquidity Cost in the Orders-Driven Market?

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  • Bogdan Negrea

    (Academia de Studii Economice / Facultatea de Finante, Asigurari, Banci si Burse de Valori)

Abstract

The paper proposes a new method based on stochastic processes theory in order to analyze the equilibrium on the financial markets under asymmetrical information. The paper proposes an analytical formula for the liquidity cost in the orders-driven market taking into consideration the presence of the informed and uninformed investors on the market. This formula is obtained taking into the consideration the fact that an investor who places a limit order offers an option to the rest of the market which can be exercised against him.

Suggested Citation

  • Bogdan Negrea, 2011. "How to Compute the Liquidity Cost in the Orders-Driven Market?," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 3(1), pages 007-019, June.
  • Handle: RePEc:rfb:journl:v:03:y:2011:i:1:p:007-019
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    References listed on IDEAS

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    1. Burton Hollifield & Robert A. Miller & Patrik Sandås, 2004. "Empirical Analysis of Limit Order Markets," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1027-1063.
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