Equilibrium in a Dynamic Limit Order Market
We model a dynamic limit order market as a stochastic sequential game with rational traders. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov-perfect equilibrium. We then generate artificial time series and perform com...
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| Veröffentlicht in: | The Journal of finance (New York) 2005-10, Vol.60 (5), p.2149-2192 |
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| container_end_page | 2192 |
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| container_issue | 5 |
| container_start_page | 2149 |
| container_title | The Journal of finance (New York) |
| container_volume | 60 |
| creator | GOETTLER, RONALD L. PARLOUR, CHRISTINE A. RAJAN, UDAY |
| description | We model a dynamic limit order market as a stochastic sequential game with rational traders. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov-perfect equilibrium. We then generate artificial time series and perform comparative dynamics. Conditional on a transaction, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average, and negatively correlated with the effective spread. Reducing the tick size is not Pareto improving but increases total investor surplus. |
| doi_str_mv | 10.1111/j.1540-6261.2005.00795.x |
| format | Article |
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| identifier | ISSN: 0022-1082 |
| ispartof | The Journal of finance (New York), 2005-10, Vol.60 (5), p.2149-2192 |
| issn | 0022-1082 1540-6261 |
| language | eng |
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| source | Wiley-Blackwell Journals; JSTOR |
| subjects | Algorithms Bid prices Business orders Capital markets Comparative analysis Economic dynamics Economic equilibrium Economic models Financial economics Financial models Game theory Limit orders Liquidity Market equilibrium Market orders Market prices Market surplus Markov analysis Statistical methods Stochastic processes Stock exchange Studies Time series Trade Transaction costs |
| title | Equilibrium in a Dynamic Limit Order Market |
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