Limit Order Book as a Market for Liquidity

Posted: 29 Feb 2008

See all articles by Thierry Foucault

Thierry Foucault

HEC Paris - Finance Department

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: 2005

Abstract

We develop a dynamic model of a limit order market populated by strategic liquidity traders of varying impatience. In equilibrium, patient traders tend to submit limit orders, whereas impatient traders submit market orders. Two variables are the key determinants of the limit order book dynamics in equilibrium: the proportion of patient traders and the order arrival rate. We offer several testable implications for various market quality measures such as spread, trading frequency, market resiliency, and time to execution for limit orders. Finally, we show the effect of imposing a minimal price variation on these measures.

Keywords: brain metastases, HRQoL, stereotactic radiosurgery

Suggested Citation

Foucault, Thierry and Kadan, Ohad and Kandel, Eugene, Limit Order Book as a Market for Liquidity ( 2005). The Review of Financial Studies, Vol. 18, Issue 4, pp. 1171-1217, 2005, Available at SSRN: https://ssrn.com/abstract=900699

Thierry Foucault (Contact Author)

HEC Paris - Finance Department ( email )

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Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

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Campus Box 1133
St. Louis, MO 63130-4899
United States

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
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Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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