Liquidity and Impact in Fair Markets

Thibault Jaisson

Papers from arXiv.org

Abstract: We develop a theory which applies to any market dynamics that satisfy a fair market assumption on the nullity of the average profit of simple market making strategies. We show that for any such fair market, there exists a martingale fair price which corresponds to the average liquidation value (at the ask or the bid) of an infinitesimal quantity of stock. We show that this fair price is a natural reference price to compute the ex post gain of limit orders. Using only the fair market assumption, we link the spread to the impact of market orders on the fair price. We use our definition of the fair price to build empirical tests of the relevance of this notion whose results are consistent with our theoretical predictions.

Date: 2015-06
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://arxiv.org/pdf/1506.02507 Latest version (application/pdf)

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:arx:papers:1506.02507

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().