Learning and Information Dissemination in Limit Order Markets

Lijian Wei (), Wei Zhang, Xuezhong (Tony) He () and Yongjie Zhang
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Wei Zhang: College of Management and Economics, Tianjin University
Yongjie Zhang: College of Management and Economics, Tianjin University

No 333, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: What can traders learn and how does learning affect the market When information is asymmetric, short-lived, and uninformed traders learn, we present an artificial limit order market model to examine the effect of learning, information value, and order aggressiveness on information dissemination efficiency, bid-ask spread, order submission, and order profit of traders. We find that learning helps the uninformed traders to acquire private information more effectively and hence improves market information dissemination. Also the informed traders in general consume liquidity while the uninformed traders mainly supply liquidity. More interestingly, due to the learning and short-lived information, the bid-ask spread and its volatility are positively related to the probability of informed trading. The results help us to understand the behavior of uninformed traders and provide substantial insight and intuition into the trading process.

Keywords: Limit order book; continuous double auction; learning; information dissemination; order aggressiveness; bid-ask spread (search for similar items in EconPapers)
JEL-codes: C63 D82 G14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-06-01
New Economics Papers: this item is included in nep-cta and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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