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Understanding limit order book depth: conditioning on trade informativeness

Author

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  • Helena Beltran
  • Albert J. Menkveld

Abstract

We study how a limit order book reacts to informed trades and adverse selection. We estimate Sandas'(2001) version of the classical Glosten (1994) order book model and accept it, but only for the first two prices displayed on each side of the book. We then relax one of the assumption and allow the level of private information in market orders to be stochastic. By conditioning on the information level, we find support for deeper order books, larger market orders and shorter inter-trade durations at times of relatively uninformative market orders, which is consistent with liquidity traders concentrating their orders at uninformative times.

Suggested Citation

  • Helena Beltran & Albert J. Menkveld, 2004. "Understanding limit order book depth: conditioning on trade informativeness," Econometric Society 2004 Latin American Meetings 142, Econometric Society.
  • Handle: RePEc:ecm:latm04:142
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    File URL: http://repec.org/esLATM04/up.23536.1081939804.pdf
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    References listed on IDEAS

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    1. Sandas, Patrik, 2001. "Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 705-734.
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    5. 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 1655-1689, December.
    6. 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.
    7. 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 103-150.
    8. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    9. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
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    12. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
    13. Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
    14. 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.
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    Cited by:

    1. Cumhur Ekinci, 2005. "Limit Order Book Reconstruction And Beyond: An Application To Istanbul Stock Exchange," Finance 0510025, University Library of Munich, Germany, revised 24 Oct 2005.

    More about this item

    Keywords

    Order book; liquidity; trade informativeness;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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