Author : Roman Kozhan
Publisher :
ISBN 13 :
Total Pages : 51 pages
Book Rating : 4.:/5 (13 download)
Book Synopsis Market Order Flows, Limit Order Flows and Returns by : Roman Kozhan
Download or read book Market Order Flows, Limit Order Flows and Returns written by Roman Kozhan and published by . This book was released on 2018 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.