The Price of Immediacy

  • Chacko G
  • Jurek J
  • Stafford E
  • 63

    Readers

    Mendeley users who have this article in their library.
  • 25

    Citations

    Citations of this article.

Abstract

This paper develops a new model of transaction costs, arising as the rents that a monopolistic market maker is able to extract from impatient investors. The mechanism for trade is a limit order, and immediacy is supplied when the limit order is executed. We show that limit orders are American options and their value represents the cost of transacting. The limit prices inducing immediate execution of the order are functionally equivalent to bid and ask prices, and can be solved for various transaction sizes to characterize the market maker's entire supply curve. We find considerable empirical support for the model's predictions in the cross-section of NYSE firms. The model produces unbiased, out-of-sample forecasts of abnormal returns for firms being added to the S&P 500 index.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Authors

  • George C. Chacko

  • Jakub W. Jurek

  • Erik Stafford

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free