Limit order book spreads, depth, and market efficiency in a general equilibrium model
Paper models equilibrium limit order book, analyzing liquidity, competitive balance, and welfare; validated with Coinbase Bitcoin/USD data.
What it examines
The study develops a search‐theoretic general equilibrium model for order book trading, linking limit orders to buyer arrival rates, price impacts, and market liquidity. It analyzes traders’ behavior and how competitive balance shapes liquidity and welfare, using Coinbase Bitcoin/USD data to calibrate and test the model.
What it concludes
The results show that competitive dynamics shape both liquidity and welfare, implying that increased liquidity may not improve overall welfare. Calibrated with Bitcoin/USD data, the model informs better trading practices, fee adjustments, and exchange competition strategies, offering implications for traders, market makers, and regulators. Future research could compare other assets.
Evidence objects
A novel equilibrium model explains effective limit order book formation by using a searchtheoretic framework that balances buyers and sellers based on traders expectations of liquidity provider and taker arrivals.
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The study reveals that gains from trade are endogenously allocated, and increased liquidity may significantly harm welfare, as narrower spreads and lower price impacts occur when trader arrivals are imbalanced.
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The study integrates theory with empirical order book data from Coinbases Bitcoin/USD platform, introducing 'competitive balance.' Its homogeneous trader and short steady-state assumptions require further research to validate the model.
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This paper introduces a robust equilibrium model connecting order book dynamics with liquidity and welfare outcomes. Its innovative, searchtheoretic framework decomposes spread variation and extracts parameters from real data. Integrating welfare analysis with competitive balance, the work provides key insights into electronic market microstructure, making it original, novel, and compelling.
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Raw abstract and provenance
- … We document the role that implied beliefs about the distribution of trader arrival and differences in trader valuations have on the competitive balance between buyers and …
Source row: 1207 · abstract type: snippet