Liquidity Shocks and Order Book Dynamics

51 Pages Posted: 4 Aug 2008 Last revised: 30 Jun 2009

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2009

Abstract

We propose a dynamic competitive equilibrium model of limit order trading, based on the premise that investors cannot monitor markets continuously. We study how limit order markets absorb transient liquidity shocks, which occur when a significant fraction of investors lose their willingness and ability to hold assets. We characterize the equilibrium dynamics of market prices, bid-ask spreads, order submissions and cancelations, as well as the volume and limit order book depth they generate.

Suggested Citation

Biais, Bruno and Weill, Pierre-Olivier, Liquidity Shocks and Order Book Dynamics (June 30, 2009). Available at SSRN: https://ssrn.com/abstract=1193442 or http://dx.doi.org/10.2139/ssrn.1193442

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Pierre-Olivier Weill (Contact Author)

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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