Published in:WBS Finance Group Research Paper ; No. 218
Extent:
1 Online-Ressource (51 p)
Language:
English
DOI:
10.2139/ssrn.2403000
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 28, 2018 erstellt
Description:
We study the relation between limit order flow, market order flow and returns. We develop a model where market-makers face inventory risk and adverse selection and show how prices depend on market and limit order flows. In the model, market-makers receive information through trade with customers and optimally split their subsequent trading between market and limit orders so as to exploit this information while controlling risk. Both types of order convey information and impact prices. Empirically, we show that adding limit order flows to regressions of (FX and equity) returns on market order flows greatly improves explanatory power. The price impact of limit orders is positive and smaller than that of market orders. Omitting limit order flows from the regression causes a large downward bias in the price impact of market orders. Thus there is evidence that traders speculate using a combination of limit orders and market orders