We study the relation between limit order flow, market order flow and returns. We develop a model where market-makers face inventory risk and adverse selection and show how prices depend on market and limit order flows. In the model, market-makers receive information through trade with customers...

Higher moments of long-horizon returns are important for asset pricing but are hard to measure accurately using standard techniques. We provide theory showing that short-horizon (e.g. daily) returns can be used to construct precise estimates of long-horizon (e.g. annual) moments without making...

We study the relation between limit order flow, market order flow and returns. We develop a model where market-makers face inventory risk and adverse selection and show how prices depend on market and limit order flows. In the model, market-makers receive information through trade with customers...