The informational roles of market and limit order submissions in stock and option markets

This dissertation examines the role of market limit orders in the price discovery process in related security markets and the level of integration between stock and option markets. I estimate both the initial price impact and the permanent price change in response to market and limit orders in and across stock and option markets. I show that limit order submissions, in any market, forecast significant permanent price changes across stock and option markets for a large majority of firms in the sample. Market orders in the stock market also forecast significant permanent price changes across markets while market orders in the option markets do not. In addition, I document that net buying pressure is serially correlated in each market but not serially correlated across markets for the majority of the firms in the sample.; The primary implication of these results is that the common theoretical assumption that informed traders only submit market orders to exploit private information is not valid. As a result, empirical estimations of asymmetric information in financial markets that omit limit orders are likely to understate the true level of adverse selection. The secondary implication is that stock and option markets are best viewed as segmented markets, with each market having its own unique clientele of traders.