Working paper

Liquidity Shocks and Order Book Dynamics

Bruno Biais, and Pierre-Olivier Weill

Abstract

We propose a dynamic competitive equilibrium model of limit order trading, based on the premise that investors cannot monitor markets continuously. We study how limit order markets absorb transient liquidity shocks, which occur when a significant fraction of investors lose their willingness and ability to hold assets. We characterize the equilibrium dynamics of market prices, bid-ask spreads, order submissions and cancelations, as well as the volume and limit order book depth they generate.

Reference

Bruno Biais, and Pierre-Olivier Weill, Liquidity Shocks and Order Book Dynamics, TSE Working Paper, n. 09-037, May 2009.

See also

Published in

TSE Working Paper, n. 09-037, May 2009