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Empirical Analysis of Limit Order Markets

  • Burton Hollifield
  • Robert Miller
  • Patrik Sandas

This paper analyzes order placement strategies in a limit order market. Traders submitting market or limit orders to the limit order book trade off the order price, the execution probability, and the winner's curse risk associated with different feasible order choices. Their optimal order strategy is characterized by a monotone function which maps the liquidity demand of the investors into their subjective execution probabilities. The primitives of this model are the time varying shock that is common to all valuations, as well as the probability distribution of private valuations, assumed to be a time invariant, independently and identically distributed random variable. Using data from the Stockholm Stock Exchange, we compute a semiparametric estimator of the primitives underlying the model. The estimated order strategies are consistent with the theoretical trade-offs. Specification tests based on the monotonicity of the optimal order strategy finds little evidence against the monotonicity restrictions.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number -290183991.

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Handle: RePEc:cmu:gsiawp:-290183991
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

Order Information: Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  17. Ahn, Hyungtaik & Manski, Charles F., 1993. "Distribution theory for the analysis of binary choice under uncertainty with nonparametric estimation of expectations," Journal of Econometrics, Elsevier, vol. 56(3), pages 291-321, April.
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