Template-type: ReDIF-Paper 1.0
Author-Name: Jeremy Large
Author-Email: jeremy.large@nuffield.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford University, UK
Title: Cancellation and Uncertainty Aversion on Limit Order Books
Abstract:
  This paper models limit order books where each trader is uncertain of the
underlying distribution in the asset's value to others. If this uncertainty is rapidly
resolved, 
eeting limit orders are submitted and quickly cancelled. This enhances
liquidity supply, but leaves intact established comparative statics results on spreads.
However, risk neutral liquidity suppliers are averse to persistent uncertainty due
to concavity in the function describing limit order utility, and spreads widen. This
helps explain wide spreads in the morning.
The model describes traders who in equilibrium correctly anticipate market
orders' endogenous stochastic intensities. It highlights how limit orders queue for
execution.
Classification-JEL:D8, G1
Keywords:market microstructure, limit order book, fleeting orders, order cancellation.
Length:31 pages
Creation-Date: 2004-02-25
Number:2004-W05
File-URL: http://www.nuff.ox.ac.uk/economics/papers/2004/W5/JLargeLimitOBFeb404.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:045