An empirical analysis of non-execution and picking-off risks on the Tokyo Stock Exchange
Ryuichi Yamamoto ()
Journal of Empirical Finance, 2014, vol. 29, issue C, 369-383
Abstract:
This paper investigates how the state of the order-book economy influences non-execution and picking-off risks. We utilize data from the limit order book and transactions in individual stocks on the Tokyo Stock Exchange. We demonstrate that, on the one hand, the risk of non-execution increases, while the risk of being picked off, on the other hand, decreases when: 1) the depth on the incoming investor’s side becomes thicker, 2) the bid-ask spread becomes narrower, 3) volatility declines, and 4) the depth on the opposite side to the incoming investor becomes thicker. In addition, we report asymmetric determinants of non-execution and picking-off risks between buy and sell limit orders, as well as among our sample firms. We interpret the asymmetry to be attributed to differences in transaction volume and order book thickness between buy and sell sides of the order book as well as among the firms. More transactions lead to higher quote competitions among limit order traders, increasing the thickness of the order book inside of the spread. It then decreases the rate of executions and of being picked off for limit orders existing outside of the spread. Our results suggest that real-time information on order book and transactions is highly valuable to stock investors, who trade individual securities and manage a portfolio of individual stocks, such as ETFs. Our findings assist real stock investors in reducing the monitoring cost, making more profitable order choices among market and limit orders and exposing/hiding/canceling/revising limit orders, and understanding the price formation process in an order-driven market. They are crucial for investors for better risk management in actual stock markets.
Keywords: Limit order market; Non-execution risk; Picking-off risk; Investment decisions; Market microstructure (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S092753981400084X
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:29:y:2014:i:c:p:369-383
DOI: 10.1016/j.jempfin.2014.09.003
Access Statistics for this article
Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff
More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().