caa a22 4500 467895880 CHVBK 20180406152804.0 cr unu---uuuuu 170328e20060101xx s 000 0 eng 10.1007/s00181-005-0009-6 doi (NATIONALLICENCE)springer-10.1007/s00181-005-0009-6 Liquidity supply and adverse selection in a pure limit order book market [Elektronische Daten] [Stefan Frey, Joachim Grammig] This paper analyzes adverse selection costs and liquidity supply in a pure open limit order book market. We relax assumptions of the Glosten/Såndas modeling framework regarding marginal zero profit order book equilibrium and the parametric market order size distribution. We show that using average zero profit conditions considerably increases the empirical performance while a nonparametric specification for market order size combined with marginal zero profit conditions does not. A cross sectional analysis corroborates the finding that adverse selection costs are more severe for smaller capitalized stocks. We also find additional support for one of the central hypothesis put forth by the theory of limit order book markets, which states that liquidity supply and adverse selection costs are inversely related. Furthermore, adverse selection cost estimates based on our structural model and those obtained using popular model-free methods are strongly correlated. This indicates the robustness of the theory-based approach. Springer-Verlag, 2005 Limit order book market nationallicence Liquidity supply nationallicence Adverse selection nationallicence G10 nationallicence C32 nationallicence Frey Stefan Faculty of Economics, Department of Statistics, Econometrics and Empirical Economics, University of Tübingen, Mohlstr. 36, 72074, Tüubingen, Germany aut Grammig Joachim Faculty of Economics, Department of Statistics, Econometrics and Empirical Economics, University of Tübingen, Mohlstr. 36, 72074, Tüubingen, Germany aut Empirical Economics Physica-Verlag 30/4(2006-01-01), 1007-1033 0377-7332 30:4<1007 2006 30 181 https://doi.org/10.1007/s00181-005-0009-6 text/html Onlinezugriff via DOI 1 research-article jats NATIONALLICENCE 856 40 https://doi.org/10.1007/s00181-005-0009-6 text/html Onlinezugriff via DOI NATIONALLICENCE 700 1- Frey Stefan Faculty of Economics, Department of Statistics, Econometrics and Empirical Economics, University of Tübingen, Mohlstr. 36, 72074, Tüubingen, Germany aut NATIONALLICENCE 700 1- Grammig Joachim Faculty of Economics, Department of Statistics, Econometrics and Empirical Economics, University of Tübingen, Mohlstr. 36, 72074, Tüubingen, Germany aut NATIONALLICENCE 773 0- Empirical Economics Physica-Verlag 30/4(2006-01-01), 1007-1033 0377-7332 30:4<1007 2006 30 181 Metadata rights reserved Springer special CC-BY-NC licence nationallicence BK010053 XK010053 XK010000 NATIONALLICENCE NATIONALLICENCE NL-springer