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Liquidity Shocks and Order Book Dynamics

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Modified on 2011/08/13 01:33 by Administrator Categorized as Articles

Bruno Biais, Pierre-Olivier Weill

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.

Published by ssrn.org on 5/19/2009

Liquidity Shocks and Order Book Dynamics