Information, Sentiment, and Price in a Fast Order-Driven Market
The IUP Journal of Financial Risk Management, Vol. VIII, No. 3, September 2011, pp. 43-75
Posted: 6 Jul 2012
Date Written: July 6, 2012
The paper models an order-driven market in which many traders with heterogeneous private values and information submit limit and market orders simultaneously. Order execution is partially random. There may be a bias in the traders’ prior beliefs (market sentiment). In this environment, although market buys and sells depend monotonically on the degree of bullish sentiment, market order flows are in a non-monotonous relationship with the proportion of high private value traders (bulls). Additionally, sentiment has a stronger effect on volume and net direction of trades leading to a given central price, than the actual distribution of private values.
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