Information, Liquidity, and Dynamic Limit Order Markets

Roberto Riccò, Barbara Rindi and Duane J. Seppi

No 660, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper describes price discovery and liquidity provision in a dynamic limit order market with asymmetric information and non-Markovian learning. Investors condition on information in both the current limit order book and also, unlike in previous research, on the prior order history when deciding whether to provide or take liquidity. Our analysis shows that the information content of the prior order history can be substantial. Surprisingly, the information content of equilibrium orders can differ from order direction and aggressiveness. JEL classiffication: G10, G20, G24, D40. Keywords: Limit order markets, asymmetric information, liquidity, market microstructure.

Date: 2020
New Economics Papers: this item is included in nep-mst and nep-ore
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