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Estimating the Gains from Trade in Limit Order MarketsBurton HollifieldCarnegie Mellon University - David A. Tepper School of Business Robert A. MillerCarnegie Mellon University - David A. Tepper School of Business Patrik SandasUniversity of Virginia; Centre for Economic Policy Research (CEPR) Joshua SliveBank of Canada Rodney L. White Center for Financial Research Working Paper No. 20-04 Abstract: We present a method for identifying and estimating the gains from trade in limit order markets and provide new empirical evidence that the limit order market is a good market design. The gains from trade in our model arise because traders have different valuations for the stock. We use observations from the traders' order submissions and the execution and cancellation histories of the traders' order submissions to estimate the distribution of traders' unobserved valuations for the stock. We use the parameter estimates for our model to compute the current gains from trade in the limit order market and the gains from trade that the traders would attain in a perfectly liquid market.
Number of Pages in PDF File: 50 Keywords: Limit Order Markets, Gains from Trade, Discrete Choice, Allocative Efficiency JEL Classification: G10, C35, D61 working papers seriesDate posted: September 11, 2004Suggested CitationContact Information
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