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Cancellation and Uncertainty Aversion on Limit Order Books

Author

Listed:
  • Jeremy Large

    () (Nuffield College, Oxford University, UK)

Abstract

This paper models limit order books where each trader is uncertain of the underlying distribution in the asset's value to others. If this uncertainty is rapidly resolved, eeting limit orders are submitted and quickly cancelled. This enhances liquidity supply, but leaves intact established comparative statics results on spreads. However, risk neutral liquidity suppliers are averse to persistent uncertainty due to concavity in the function describing limit order utility, and spreads widen. This helps explain wide spreads in the morning. The model describes traders who in equilibrium correctly anticipate market orders' endogenous stochastic intensities. It highlights how limit orders queue for execution.

Suggested Citation

  • Jeremy Large, 2004. "Cancellation and Uncertainty Aversion on Limit Order Books," Economics Papers 2004-W05, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:045
    as

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    File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/W5/JLargeLimitOBFeb404.pdf
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    References listed on IDEAS

    as
    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
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    4. 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.
    5. McInish, Thomas H & Wood, Robert A, 1992. " An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-764, June.
    6. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
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    12. 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.
    13. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    Cited by:

    1. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2009. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Journal of Financial Economics, Elsevier, vol. 91(3), pages 319-338, March.
    2. Hasbrouck, Joel & Saar, Gideon, 2009. "Technology and liquidity provision: The blurring of traditional definitions," Journal of Financial Markets, Elsevier, vol. 12(2), pages 143-172, May.

    More about this item

    Keywords

    market microstructure; limit order book; fleeting orders; order cancellation.;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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