Empirical Analysis of Limit Order Markets
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.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.tepper.cmu.edu/
|Order Information:||Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Biais, Bruno & Martimort, David & Rochet, Jean-Charles, 1998.
"Competing Mechanisms in a Commun Value Environment,"
IDEI Working Papers
75, Institut d'Économie Industrielle (IDEI), Toulouse.
- Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
- Bernard ELYAKIME & Jean-Jacques LAFFONT & Patrice LOISEL & Quang VUONG, 1994.
"First-Price Sealed-Bid Auctions with Secret Reservation Prices,"
Annales d'Economie et de Statistique,
ENSAE, issue 34, pages 115-141.
- Elyakime, Bernard & Laffont, Jean-Jacques & Loisel, Patrice & Vuong, Quang, 1993. "First-Price Sealed-Bid Auctions with Secret Reservation Prices," IDEI Working Papers 27, Institut d'Économie Industrielle (IDEI), Toulouse.
- Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May.
- Kenneth A. Kavajecz, 1999. "A Specialist's Quoted Depth and the Limit Order Book," Journal of Finance, American Finance Association, vol. 54(2), pages 747-771, 04.
- Domowitz, Ian, 1993.
"A taxonomy of automated trade execution systems,"
Journal of International Money and Finance,
Elsevier, vol. 12(6), pages 607-631, December.
- Michael A. Goldstein & Kenneth A. Kavajecz, .
"Liquidity Provision during Circuit Breakers and Extreme Market Movements,"
Rodney L. White Center for Financial Research Working Papers
1-00, Wharton School Rodney L. White Center for Financial Research.
- Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 01-00, Wharton School Rodney L. White Center for Financial Research.
- Wolak, Frank A., 1989. "Local and Global Testing of Linear and Nonlinear Inequality Constraints in Nonlinear Econometric Models," Econometric Theory, Cambridge University Press, vol. 5(01), pages 1-35, April.
- Robinson, P M, 1989. "Hypothesis Testing in Semiparametric and Nonparametric Models for Econometric Time Series," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 511-34, October.
- 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.
- Robert F. Engle, 1996.
"The Econometrics of Ultra-High Frequency Data,"
NBER Working Papers
5816, National Bureau of Economic Research, Inc.
- Laffont, Jean-Jacques & Vuong, Quang, 1996. "Structural Analysis of Auction Data," American Economic Review, American Economic Association, vol. 86(2), pages 414-20, May.
- O'Hara, Maureen & Oldfield, George S., 1986. "The Microeconomics of Market Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 361-376, December.
- Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
- Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
- Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-89, December.
- Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
- de Jong, Robert M., 2001. "Nonlinear estimation using estimated cointegrating relations," Journal of Econometrics, Elsevier, vol. 101(1), pages 109-122, March.
- Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-50.
- Tauchen, George E & Pitts, Mark, 1983. "The Price Variability-Volume Relationship on Speculative Markets," Econometrica, Econometric Society, vol. 51(2), pages 485-505, March.
- Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 29-60, January.
- Handa, Puneet & Schwartz, Robert A, 1996. " Limit Order Trading," Journal of Finance, American Finance Association, vol. 51(5), pages 1835-61, December.
- Ready, Mark J, 1999. "The Specialist's Discretion: Stopped Orders and Price Improvement," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1075-1112.
- Collomb, Gérard & Härdle, Wolfgang, 1986. "Strong uniform convergence rates in robust nonparametric time series analysis and prediction: Kernel regression estimation from dependent observations," Stochastic Processes and their Applications, Elsevier, vol. 23(1), pages 77-89, October.
- Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:-290183991. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Steve Spear)
If references are entirely missing, you can add them using this form.