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An Analysis of Changes in Specialist Inventories and Quotations

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Author Info
 Madhavan, Ananth
Smidt, Seymour

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Abstract

The authors develop a dynamic model of market-making incorporating inventory and information effects. The marketmaker is both a dealer and an investor, quoting prices that induce mean reversion in inventory toward targets determined by portfolio considerations. The authors test the model with inventory data from a New York Stock Exchange specialist. Specialist inventories exhibit slow mean reversion, with a half-life of over forty-nine days, suggesting weak inventory effects. However, after controlling for shifts in desired inventories, the half-life falls to seven and three-tenths days. Further, quote revisions are negatively related to specialist trades and are positively related to the information conveyed by order imbalances. Copyright 1993 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 5 (December)
Pages: 1595-1628
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Handle: RePEc:bla:jfinan:v:48:y:1993:i:5:p:1595-1628

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  1. Geir Hoidal Bjonnes & Dagfinn Rime, 2003. "Dealer Behavior and Trading Systems in Foreign Exchange Markets," Working Paper 2003/10, Norges Bank. [Downloadable!]
    Other versions:
  2. Shafiqur Rahman & Chandrasekhar Krishnamurti & Alice Lee, 2005. "The Dynamics of Security Trades, Quote Revisions, and Market Depths for Actively Traded Stocks," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 91-124, September. [Downloadable!] (restricted)
  3. Sugato Chakravarty, 2002. "Stealth-Trading: Which Traders' Trades Move Stock Prices?," Finance 0201003, EconWPA. [Downloadable!]
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  4. Albert J. Menkveld & Siem Jan Koopman & André Lucas, 2003. "Round-the-Clock Price Discovery for Cross-Listed Stocks: US-Dutch Evidence," Tinbergen Institute Discussion Papers 03-037/2, Tinbergen Institute, revised 13 Oct 2003. [Downloadable!]
  5. Chris D'Souza & Charles Gaa & Jing Yang, 2003. "An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds," Working Papers 03-28, Bank of Canada. [Downloadable!]
  6. Sugato Chakravarty & Asani Sarkar, 1999. "Liquidity in U.S. fixed income markets: a comparison of the bid-ask spread in corporate, government and municipal bond markets," Staff Reports 73, Federal Reserve Bank of New York. [Downloadable!]
  7. Dunne, Peter & Hau, Harald & Moore, Michael, 2008. "A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market," CEPR Discussion Papers 6969, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Michael J. Fleming & Joshua V. Rosenberg, 2007. "How do treasury dealers manage their positions?," Staff Reports 299, Federal Reserve Bank of New York. [Downloadable!]
  9. Lescourret, Laurence & Robert, Christian Y., 2006. "Preferencing, internalization and inventory position," ESSEC Working Papers DR 06017, ESSEC Research Center, ESSEC Business School. [Downloadable!]
  10. Alexis Derviz, 2003. "Components of the Czech Koruna Risk Premium in a Multiple-Dealer FX Market," Working Papers 2003/04, Czech National Bank, Research Department. [Downloadable!]
  11. Victoria Saporta & Giorgio Trebeschi & Anne Vila, . "Price formation and transparency on the London Stock Exchange," Bank of England working papers 95, Bank of England. [Downloadable!]
  12. Chris D'Souza, 2002. "How Do Canadian Banks That Deal in Foreign Exchange Hedge Their Exposure to Risk?," Working Papers 02-34, Bank of Canada. [Downloadable!]
  13. Sigridur Benediktsdottir, 2006. "An empirical analysis of specialist trading behavior at the New York Stock Exchange," International Finance Discussion Papers 876, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Carl Chiarella & Roberto Dieci & Laura Gardini, 2003. "A Dynamic Analysis of Speculation Across Two Markets," Research Paper Series 89, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  15. Thomas Gehrig & Matthew Jackson, 1994. "Bid-Ask Spreads with Indirect Competition Among Specialists," Discussion Papers 1107, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  16. Ken Nyholm, 2003. "Inferring the private information content of trades: a regime-switching approach

    The views presented in the paper are not necessarily shared by," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 457-470. [Downloadable!]

  17. Bohl, Martin T. & Gottschalk, Katrin & Pál, Rozália, 2006. "Institutional investors and stock market efficiency: The case of the January anomaly," MPRA Paper 677, University Library of Munich, Germany, revised Nov 2006. [Downloadable!]
  18. Ron Kaniel & Hong Liu, . "Are Transactions and Market Orders More Important than Limit Orders in the Quote Updating Process?," Rodney L. White Center for Financial Research Working Papers 16-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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