Order aggressiveness, pre-trade transparency, and long memory in an order-driven market

Research output: Contribution to journalArticle

19 Citations (Scopus)

Abstract

Recent empirical research has documented that the state of the limit order book influences stock investors' strategies. Investors place more aggressive orders when the same side of the order book is thicker, and less aggressive orders when it is thinner. We conjecture and demonstrate that this behavior is related to long memories of trading volume, volatility, and order signs in stock markets. We investigate our conjecture in two types of artificial stock markets: a transparent market, in which agents observe all limit orders on both sides of the book and order volumes at those prices before they trade; and a less transparent market, in which agents observe only the best five bid and ask quotes with the depth available at these limit prices. The first market structure resembles certain actual stock exchanges in the level of pre-trade transparency, such as the Australian Stock Exchange, NYSE OpenBook, and the London Stock Exchange, whereas the second market structure is consistent with stock exchanges such as Euronext Paris, the Toronto Stock Exchange, the Tokyo Stock Exchange, and Hong Kong Exchanges and Clearing. We demonstrate that our long memory results are robust with different levels of pre-trade transparency, implying that the strategy constructed by the state of the order book is key for explaining long memories in many actual stock exchanges.

Original languageEnglish
Pages (from-to)1938-1963
Number of pages26
JournalJournal of Economic Dynamics and Control
Volume35
Issue number11
DOIs
Publication statusPublished - 2011 Nov
Externally publishedYes

Fingerprint

Long Memory
Transparency
Data storage equipment
Stock Market
Empirical Research
Market
Trade
Order-driven markets
Stock exchange
Long memory
Volatility
Demonstrate
Financial markets
Order book
Market structure
Investors

Keywords

  • Agent-based modeling
  • Long memory
  • Market microstructure
  • Order aggressiveness
  • Pre-trade transparency

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Cite this

Order aggressiveness, pre-trade transparency, and long memory in an order-driven market. / Yamamoto, Ryuichi.

In: Journal of Economic Dynamics and Control, Vol. 35, No. 11, 11.2011, p. 1938-1963.

Research output: Contribution to journalArticle

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