Quote setting Price Formation .pdf

Quote setting Price Formation

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Synopsis E-book: Quote setting Price Formation .pdf

This paper models quote setting and price formation in a non-intermediated, order driven market, ad tests the model using transaction data on individual stocks in the ParisBourse CAC40 index. n an extension of Foucault (1999) where investor share valuations for a security differ, we xamine the impact of asymmetric information on posted bid and ask prices. Our primary bjective is to analyze the determinants of the bid-ask spread in an order driven market and our ain contribution is to test the empirical implications of the extended Foucault model. he theoretical model we present in this paper shows, and our empirical tests confirm, that the ize of the inside spread in an order driven market is a function of differences in valuation among nvestors.

As we will explain, our analysis in this regard may be viewed as an extension of ohen, Maier, Schwartz and Whitcomb (1981) who demonstrate that a natural bid-ask spread xists in an order driven market because of the “gravitational pull” an already posted order has on new, incoming order.1 The current paper also extends Handa and Schwartz (1996) who analyze he rationale and profitability of limit order trading, but who do not explicitly model a trader’s ecision as to whether to place a limit order or a market order. Our analysis is also closely related o Glosten (1994) who examines the inevitability of an electronic limit order book when there is an exogenous supply of limit orders.


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  • FileName: Quote setting Price Formation .Pdf
  • Author: Puneet Handa
  • Language: English
  • Dir.: part1
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