Informed traders and limit order markets

Ronald L. Goettler, Christine A. Parlour and Uday Rajan

Journal of Financial Economics, 2009, vol. 93, issue 1, 67-87

Abstract: We consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit. We numerically solve for the equilibrium and demonstrate that the market is a "volatility multiplier": prices are more volatile than the fundamental value of the asset. This effect increases when the fundamental value has high volatility and with asymmetric information across traders. Changes in the microstructure noise are negatively correlated with changes in the estimated fundamental value, implying that asset betas estimated from high-frequency data will be incorrect.

Keywords: Limit; order; market; Informed; traders; Endogenous; information; acquisition; Computational; game (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (103)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-405X(09)00056-7
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:jfinec:v:93:y:2009:i:1:p:67-87

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().