THE LIQUIDITY ON THE MARKET GOVERNED BY ORDERS

Bogdan Negrea

Theoretical and Applied Economics, 2008, vol. 12(517)(supplement), issue 12(517)(supplement), 24-30

Abstract: This paper proposes a new method based on stochastic calculus in order to analyze the liquidity on the market governed by orders in the presence of the informed agents. The paper proposes a new formula in order to compute the market liquidity. This analytical formula is obtained from the options valuation methods following the fact that an agent who places a limit order offers an option to the rest of the market which can be exercised against him. The analytical formula of the liquidity cost for a market governed by orders depends on four parameters: the risk-free interest rate, the transaction price of the financial asset, the volatility of the financial asset and the limit price.

Keywords: microstructure; information asymmetry; liquidity; stochastic calculus; limit order. (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:agr:journl:v:12(517)(supplement):y:2008:i:12(517)(supplement):p:24-30

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