TY - JOUR
AU - Lehmann,Bruce
TI - Arbitrage-free Limit Order Books and the Pricing of Order Flow Risk
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13848
PY - 2008
Y2 - March 2008
DO - 10.3386/w13848
UR - http://www.nber.org/papers/w13848
L1 - http://www.nber.org/papers/w13848.pdf
N1 - Author contact info:
Bruce Lehmann
University of California, San Diego
IR/PS
1415 Robinson Building Complex
La Jolla, CA 92093-0519
Tel: 858/534-0945
Fax: 858/534-3939
E-Mail: blehmann@ucsd.edu
AB - This paper builds on the landmark contribution of Glosten (1994) by treating the determination of limit order supply schedules as an exercise in asset pricing theory with the possible sizes of incoming market orders as the value-relevant states of nature, yielding an analogue of the Fundamental Theorem of Asset Pricing. State prices and price impact prove to be proportional to the slope of the book and simple nonparametric and semiparametric models for limit order book dynamics arise when the price of order flow risk is constant over time, providing a comprehensive and coherent framework for organizing limit order book data.
ER -