Informed traders and limit order markets |
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Authors: | Ronald L Goettler Christine A Parlour Uday Rajan |
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Institution: | 1. Booth School of Business, University of Chicago, USA;2. Haas School of Business, University of California, Berkeley, USA;3. Ross School of Business, University of Michigan, Ann Arbor, USA |
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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. |
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Keywords: | G14 C63 C73 D82 |
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