Journal of Financial Economics Vol. 93 No. 1 2009

Informed traders and limit order markets

Ronald L. Goettler¹; Christine A. Parlour²; Uday Rajan^3,4

¹ University of Chicago · ² University of California, Berkeley · ³ University of Michigan–Ann Arbor · ⁴ Ross School

Abstract

We consider a dynamic limit order market in which traders optimally choose whether to acquire information about the asset and the type of order to submit. We numerically solve for the equilibrium and demonstrate that the market is a “volatility multiplier”: prices are more volatile than the fundamental value of the asset. This effect increases when the fundamental value has high volatility and with asymmetric information across traders. Changes in the microstructure noise are negatively correlated with changes in the estimated fundamental value, implying that asset betas estimated from high-frequency data will be incorrect.

DOI

10.1016/j.jfineco.2008.08.002

Volume

93

Issue

1

Pages

67-87

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓