Journal article
Quote setting and price formation in an order driven market
Journal of financial markets (Amsterdam, Netherlands), Vol.6(4), pp.461-489
08/01/2003
DOI: 10.1016/S1386-4181(02)00041-1
Abstract
This paper models quote setting and price formation in a non-intermediated, order driven market where trading occurs because investors differ in their share valuations and the advent of news that is not common knowledge, and tests the model using transaction data on individual stocks in the ParisBourse CAC40 index. As an extension of
Foucault (1999), we show that the size of the spread is a function of the differences in valuation among investors and of adverse selection. Both GMM estimation of the model parameters and empirical evidence on spread behavior as the relative proportion of buyers and sellers in the market changes, provide strong support for the model. Our analysis yields further insight into the dynamic process of price formation and into the market clearing process in an order driven market.
Details
- Title: Subtitle
- Quote setting and price formation in an order driven market
- Creators
- Puneet Handa - University of IowaRobert Schwartz - Baruch CollegeAshish Tiwari - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Journal of financial markets (Amsterdam, Netherlands), Vol.6(4), pp.461-489
- Publisher
- Elsevier B.V
- DOI
- 10.1016/S1386-4181(02)00041-1
- ISSN
- 1386-4181
- eISSN
- 1878-576X
- Language
- English
- Date published
- 08/01/2003
- Academic Unit
- Finance
- Record Identifier
- 9984380488102771
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