Information, Liquidity, and Dynamic Limit Order Markets

57 Pages Posted: 7 Sep 2017 Last revised: 24 May 2018

See all articles by Roberto Riccò

Roberto Riccò

Bocconi University - Department of Finance

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Duane J. Seppi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: May 16, 2018

Abstract

This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. In particular, investors condition on information in both the current limit order book and also, unlike in previous research, on the prior trading history when deciding whether to provide or take liquidity. Numerical examples show that the information content of the prior order history can be substantial. In addition, the information content of arriving orders can be non-monotone in both the direction and aggressiveness of arriving orders.

Keywords: Limit order markets, asymmetric information, liquidity, market microstructure

JEL Classification: G10, G20, G24, D40

Suggested Citation

Riccò, Roberto and Rindi, Barbara and Seppi, Duane J., Information, Liquidity, and Dynamic Limit Order Markets (May 16, 2018). Available at SSRN: https://ssrn.com/abstract=3032074 or http://dx.doi.org/10.2139/ssrn.3032074

Roberto Riccò

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Duane J. Seppi (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2298 (Phone)
412-268-8896 (Fax)

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