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Understanding limit order book depth: conditioning on trade informativeness

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  • Helena Beltran
  • Albert J. Menkveld

Abstract

We study how a limit order book reacts to informed trades and adverse selection. We estimate Sandas'(2001) version of the classical Glosten (1994) order book model and accept it, but only for the first two prices displayed on each side of the book. We then relax one of the assumption and allow the level of private information in market orders to be stochastic. By conditioning on the information level, we find support for deeper order books, larger market orders and shorter inter-trade durations at times of relatively uninformative market orders, which is consistent with liquidity traders concentrating their orders at uninformative times.

Suggested Citation

  • Helena Beltran & Albert J. Menkveld, 2004. "Understanding limit order book depth: conditioning on trade informativeness," Econometric Society 2004 Latin American Meetings 142, Econometric Society.
    • Handle: RePEc:ecm:latm04:142
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    References listed on IDEAS

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    Cited by:

    1. Cumhur Ekinci, 2005. "Limit Order Book Reconstruction And Beyond: An Application To Istanbul Stock Exchange," Finance 0510025, University Library of Munich, Germany, revised 24 Oct 2005.

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    More about this item

    Keywords

    Order book; liquidity; trade informativeness;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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