Order Integration and the Dynamic Behavior of Security Prices
47 Pages Posted: 12 Mar 2014 Last revised: 18 Mar 2016
Date Written: March 2, 2016
Abstract
Strengthening competition in the equity markets has long been a major public policy objective. This paper turns to another important determinant of market quality, one that has received relatively little attention in the public policy debates: order integration — the way in which orders are matched together and turned into trades. A conceptual framework is set forth, and simulation analysis undertaken in a laboratory-type setting. We find that imperfect order integration can generate the accentuated intra-day volatility, kurtosis, and returns autocorrelation that characterize the dynamic behavior of prices. The analysis has important implications for market structure and regulatory policy.
Keywords: stock return distribution, tail thickness, excess kurtosis, mixture of distributions, time-varying volatility
JEL Classification: G10, G12, C8, C9
Suggested Citation: Suggested Citation