Adverse Selection; Empirical Evidence from the Relationship between Price and Volume in Limit Order Books of China Stock Market

摘要

This paper analyzes the adverse selection cost by examining the relationship between price and volume in limit order books from China stock market. With Generalized Method of Moments based on static character conditions for marginal limit orders and dynamic updating conditions for order book revisions over time, we find that the adverse selection cost has significant transitory impact on price. Furthermore, adverse selection cost is greater (smaller) in markets with higher (lower) stock-specific volatility and lower (higher) trading volume and order-imbalance.