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Liquidity supply and adverse selection in a pure limit order book market 97
parameters. The estimation results based on the Xetra data are in line with the
central findings reported by Såndas (2001). Only for two out of thirty stocks the
model is not rejected at 1% significance level. In Såndas' (2001) application
the model was rejected for all stocks. Like in Såndas' (2001) application, the
transaction cost estimates (γ) are significantly negative, a result that is difficult to
reconcile with the underlying theoretical model. Hence, even with a data generating
process that corresponds very close to the theoretical framework, the model
does not seem to fit the data very well.
Tables 3 and 4 report the results that are obtained when the modified moment
conditions suggested in the previous section are used. As before, the first four
Table 3 First stage GMM results for the nonparametric specification
Ticker α γ μ J(9) p-value
TUI 0.0040 (140.1) −0.0091 (52.9) −0.0001 (2.3) 0.7 1.000
LIN 0.0169 (122.1) −0.0142 (49.8) 0.0003 (2.8) 3.4 0.945
DB1 0.0111 (110.2) −0.0123 (39.0) 0.0001 (1.1) 11.1 0.270
HEN3 0.0301 (95.2) −0.0120 (31.5) −0.0002 (1.5) 19.7 0.020
ALT 0.0169 (129.8) −0.0117 (47.9) −0.0002 (1.8) 33.5 0.000
HVM 0.0012 (134.2) −0.0058 (60.8) 0.0000 (0.8) 41.9 0.000
ADS 0.0403 (119.3) −0.0125 (30.1) −0.0002 (1.2) 68.3 0.000
MEO 0.0103 (141.2) −0.0139 (64.3) 0.0000 (0.3) 72.8 0.000
FME 0.0299 (79.8) −0.0119 (22.3) 0.0000 (0.2) 84.5 0.000
CONT 0.0094 (120.6) −0.0127 (52.6) 0.0001 (2.1) 87.5 0.000
IFX 0.0003 (235.2) −0.0032 (69.9) 0.0000 (0.2) 97.9 0.000
MAN 0.0076 (127.5) −0.0125 (58.8) 0.0003 (5.0) 101.3 0.000
BMW 0.0039 (188.1) −0.0072 (66.8) −0.0001 (2.7) 112.9 0.000
LHA 0.0015 (162.9) −0.0075 (68.5) 0.0001 (4.1) 165.3 0.000
VOW 0.0048 (28.4) −0.0092 (21.9) 0.0001 (0.2) 169.4 0.000
SCH 0.0078 (147.3) −0.0080 (45.9) 0.0000 (0.4) 173.0 0.000
DPW 0.0019 (168.3) −0.0064 (53.0) −0.0001 (2.9) 176.8 0.000
RWE 0.0038 (209.4) −0.0073 (74.0) 0.0001 (3.2) 189.2 0.000
BAY 0.0018 (196.6) −0.0034 (44.4) 0.0000 (1.3) 349.3 0.000
CBK 0.0013 (196.2) −0.0060 (68.0) 0.0000 (2.0) 427.8 0.000
BAS 0.0041 (222.3) −0.0057 (62.7) 0.0000 (0.8) 574.9 0.000
TKA 0.0019 (164.7) −0.0077 (68.7) 0.0000 (1.1) 721.3 0.000
DCX 0.0022 (235.6) −0.0036 (49.8) 0.0001 (5.8) 760.9 0.000
EOA 0.0043 (227.8) −0.0047 (50.3) 0.0000 (0.7) 1,050.8 0.000
SAP 0.0274 (228.6) −0.0099 (39.5) 0.0004 (4.9) 1,070.5 0.000
MUV2 0.0140 (219.1) −0.0074 (47.7) 0.0000 (0.7) 1,508.2 0.000
DTE 0.0001 (380.6) −0.0022 (73.5) 0.0000 (0.0) 1,514.1 0.000
DBK 0.0046 (265.3) −0.0046 (49.6) 0.0000 (0.7) 1,633.5 0.000
ALV 0.0134 (241.2) −0.0048 (22.7) −0.0002 (4.0) 2,152.3 0.000
SIE 0.0039 (312.6) −0.0032 (35.5) 0.0001 (2.6) 2,912.9 0.000
2×4 quotes from the bid and ask side of the visible book are used to construct update and break
even conditions derived from the zero marginal expected profit condition as in Såndas (2001). For
the construction of the moment conditions, the empirical distribution of the market order sizes is
used instead of the exponential distribution. The stocks are sorted by ascending order of the
J-statistic