Strategic trading with uncertain market depth

Youcheng Lou () and Junghum Park
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Youcheng Lou: Academy of Mathematics and Systems Science, Chinese Academy of Sciences

No 132, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: We study a model of strategic informed traders submitting market orders together with noise traders where an uncertainty over the overall participation of strategic and noise traders leads to an uncertainty over market depth. Our analysis compares the main case with such uncertainty with the benchmark case without it. When liquidity is driven by informed trading (noise trading), expected trading volume is higher (lower) and expected price informativeness is lower (higher) in the main case compared with the benchmark case. We also analyze the effects of random variation of the aggregate participation, which confound the effects of market expansion and thereby possibly lead to higher expected trading volume and lower expected price informativeness following market expansion. Further, these results can explain a negative volume-volatility relation and a negative impact of transparency reforms on price informativeness.

Keywords: Market depth; liquidity; trading volume; price informativeness (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2025-03-24
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