Speaker: Martin J Dierker (University of Houston)
Theme: «A Good Day to Buy is Not a Good Day to Sell: An Investigation of Limit Order Supply and Demand Curves»
On Thursday, May 24 at 4.40 pm International College of Economics and Finance and International Laboratory of Financial Economics will hold Research seminar in Finance.
Speaker: Martin J Dierker (University of Houston)
Theme: «A Good Day to Buy is Not a Good Day to Sell: An Investigation of Limit Order Supply and Demand Curves»
Venue: Pokrovski Bulvar, 11, Room Zh-822
Abstract:A parsimonious model in which a fixed number of risk-averse investors trade due to differences in opinion yields theoretical restrictions on demand and supply curves for common stocks, and shows how liquidity provision in buy and sell-sides is intertwined with each other. Our model provides conditions for negative and positive cross-correlations between demand and supply elasticities. Negative cross-correlation implies an asymmetry in liquidity provision while positive cross-correlation implies changes in overall-liquidity in the market. We examine the relative importance of the two using limit order demand and supply curves constructed from complete limit order books of the Korea Stock Exchange between 1997 and 2000, which include the 1998 Asian financial crisis. We find that auto correlation of each curve is positive but cross-correlation between the two measured at monthly frequency is stably negative throughout the sample period (averaged at -0.7). These stable high frequency negative correlations are observed around the long-run common trends in the level of elasticities of the two, which exhibit a substantial variation around the financial crisis. Positive auto-correlation and negative cross-correlation implies a possible liquidity-timing opportunity for fund managers who need to buy or sell large quantities frequently.
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