Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93901
Authors: 
Foucault, Thierry
Moinas, Sophie
Theissen, Erik
Year of Publication: 
2004
Series/Report no.: 
SFB/TR 15 Discussion Paper 3
Abstract: 
Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004: We develop a model of limit order trading in which some traders have better information on future price volatility. As limit orders have option-like features, this information is valuable for limit order traders. We solve for informed and uninformed limit order traders' bidding strategies in equilibrium when limit order traders' IDs are concealed and when they are visible. In either design, a large (resp. small) spread signals that informed limit order traders expect volatility to be high (resp. low). However the quality of this signal and market liquidity are different in each market design. We test these predictions using a natural experiment. As of April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. For our sample stocks, we find that following this change, the average quoted and effective spreads declined significantly. Consistent with our model, we also find that the size of the spread is a predictor of future price volatility and that the strength of the association between the spread and volatility is weaker after the switch to anonymity.
Subjects: 
Market Microstructure
Limit Order Trading
Anonymity
Transparency
Liquidity
Volatility Forecasts
JEL: 
G10
G14
G24
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.