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Strategic trading with uncertain market depth

Author

Listed:
  • Youcheng Lou

    (Academy of Mathematics and Systems Science, Chinese Academy of Sciences)

  • Junghum Park

    (Bank of Lithuania)

Abstract

We study a model of strategic informed traders submitting market orders together with noise traders where an uncertainty over the overall participation of strategic and noise traders leads to an uncertainty over market depth. Our analysis compares the main case with such uncertainty with the benchmark case without it. When liquidity is driven by informed trading (noise trading), expected trading volume is higher (lower) and expected price informativeness is lower (higher) in the main case compared with the benchmark case. We also analyze the effects of random variation of the aggregate participation, which confound the effects of market expansion and thereby possibly lead to higher expected trading volume and lower expected price informativeness following market expansion. Further, these results can explain a negative volume-volatility relation and a negative impact of transparency reforms on price informativeness.

Suggested Citation

  • Youcheng Lou & Junghum Park, 2025. "Strategic trading with uncertain market depth," Bank of Lithuania Working Paper Series 132, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:132
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    More about this item

    Keywords

    Market depth; liquidity; trading volume; price informativeness;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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