Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures

Yves Rannou

Economic Modelling, 2019, vol. 81, issue C, 387-410

Abstract: This paper provides a suitable model for studying the strategic behavior of uninformed investors that trade commodity derivatives via limit order books. Two main testable implications are obtained after solving for the model equilibrium. The adverse selection costs of uninformed traders depend on the inflow of market orders and their risk aversion. Next, the adverse selection costs of uninformed buyers and sellers and the difference of their asset valuations determine the size of their bid-ask spread.

Keywords: Market microstructure; Limit order book; Uninformed traders; Bid-ask spread; European carbon futures (search for similar items in EconPapers)
JEL-codes: C30 G11 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:81:y:2019:i:c:p:387-410

DOI: 10.1016/j.econmod.2019.07.009

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