Stock Market Limit Order Thin Volume And Price Relationships, And Adverse Selection Costs

Research on the features of limit order books under continuous double auction mechanism in the order-driven market is an important field of financial market microstructure theory. Using the high-frequency data of SHANGHAI SHENZHEN 300INDEX component stocks, this dissertation empirically studies the price-volume model in limit order books and analyzes adverse selection cost in China Stock Market.The main contents are as follows:1. This dissertation analyzes the price-volume model in limit order books in China Stock Market. Firstly, it introduces the price-volume model in limit order books. Then, through the empirical analysis with Generalized Method of Moments based on static feature conditions for marginal limit orders and rational updating conditions for order books revisions over time, it showes that adverse selection cost significantly influences the short-term price dynamics, and the price-volume model can describe the features of China Stock Market more exactly than the GH model. As an emerging market, China Stock Market can be better depicted by the price-volume model than Stockholm Stock Exchange.2. This dissertation extends the price-volume model in limit order books. Firstly, it puts emphasis on how the time interval between trades influences on the equilibrium state and the probability distribution of market orders. Then the price-volume model is extended. The empirical result shows that adverse selection cost significantly influences the short-term price dynamics. Furthermore, adverse selection cost is greater (smaller) in markets with higher (lower) stock-specific volatility and lower (higher) trading volume and order imbalance, implying that the majority of traders are liquidity traders in China Stock Market.3. This dissertation shows that adverse selection component estimates based on the price-volume model in limit order books and those obtained using popular model-free methods are closely correlated. This result indicates the robustness of the structural model. With a cross sectional analysis, it is found that SHANGHAI Stock Market is insignificantly different from SHENZHEN Stock Market in information asymmetry, and adverse selection costs are more severe for smaller capitalized stocks. Furthermore, it shows empirical evidence for one of the main hypothesis put forth by the theory of limit order book markets, which states that liquidity supply and adverse selection costs are inversely related.