Empirical Analysis of Limit Order Markets

Burton Hollifield (), Robert Miller and Patrik Sandas

GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: This paper analyzes order placement strategies in a limit order market. Traders submitting market or limit orders to the limit order book trade off the order price, the execution probability, and the winner's curse risk associated with different feasible order choices. Their optimal order strategy is characterized by a monotone function which maps the liquidity demand of the investors into their subjective execution probabilities. The primitives of this model are the time varying shock that is common to all valuations, as well as the probability distribution of private valuations, assumed to be a time invariant, independently and identically distributed random variable. Using data from the Stockholm Stock Exchange, we compute a semiparametric estimator of the primitives underlying the model. The estimated order strategies are consistent with the theoretical trade-offs. Specification tests based on the monotonicity of the optimal order strategy finds little evidence against the monotonicity restrictions.

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Related works:
Journal Article: Empirical Analysis of Limit Order Markets (2004)
Working Paper: Empirical Analysis of Limit Order Markets (2001)
Working Paper: An Empirical Analysis of Limit Order Markets
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