Abstract
Original language | English |
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Place of Publication | Tilburg |
Publisher | Finance |
Volume | 2002-42 |
Publication status | Published - 2002 |
Publication series
Name | CentER Discussion Paper |
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Volume | 2002-42 |
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Keywords
- pricing
- information
- market structure
- capital markets
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Market Efficiency and Price Formation When Dealers are Asymmetrically Informed. / Calcagno, R.; Lovo, S.M.
Tilburg : Finance, 2002. (CentER Discussion Paper; Vol. 2002-42).Research output: Working paper › Discussion paper › Other research output
TY - UNPB
T1 - Market Efficiency and Price Formation When Dealers are Asymmetrically Informed
AU - Calcagno, R.
AU - Lovo, S.M.
PY - 2002
Y1 - 2002
N2 - We consider the effect of asymmetric information on the price formation process in a quote-driven market where one market maker receives a private signal on the security fundamental.A model is presented where market makers repeatedly compete in prices: at each stage a bid-ask auction occurs and the winner trades the security against liquidity traders.We show that at equilibrium the market is not strong-form efficient until the last stage.We characterize a reputational equilibrium in which the informed market maker will affect market beliefs, and possibly misleads them.At this equilibrium, a price leadership effect arises, quotes are never equal to the expected value of the asset given the public information, the informed market maker expected payoff is positive and the rate of price discovery increases in the last stages of trade before the information becomes public.
AB - We consider the effect of asymmetric information on the price formation process in a quote-driven market where one market maker receives a private signal on the security fundamental.A model is presented where market makers repeatedly compete in prices: at each stage a bid-ask auction occurs and the winner trades the security against liquidity traders.We show that at equilibrium the market is not strong-form efficient until the last stage.We characterize a reputational equilibrium in which the informed market maker will affect market beliefs, and possibly misleads them.At this equilibrium, a price leadership effect arises, quotes are never equal to the expected value of the asset given the public information, the informed market maker expected payoff is positive and the rate of price discovery increases in the last stages of trade before the information becomes public.
KW - pricing
KW - information
KW - market structure
KW - capital markets
M3 - Discussion paper
VL - 2002-42
T3 - CentER Discussion Paper
BT - Market Efficiency and Price Formation When Dealers are Asymmetrically Informed
PB - Finance
CY - Tilburg
ER -