Risk Aversion, Transparency, and Market Performance
AbstractUsing a model of market making with inventories based on Biais (1993), we find that investors obtain more favorable execution prices, and they hence invest more, when markets are fragmented. In our model, risk-averse dealers use less aggressive price strategies in more transparent markets (centralized) because quote dissemination alleviates uncertainty about the prices quoted by other dealers and, hence, reduces the need to compete aggressively for order flow. Further, we show that the move toward greater transparency (centralization) may have detrimental effects on liquidity and welfare. Copyright The American Finance Association 2002.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 57 (2002)
Issue (Month): 2 (04)
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- He, Yinghua & Nielsson, Ulf & Guo, Hong & Yang, Jiong, 2012. "Subscribing to Transparency," TSE Working Papers 12-351, Toulouse School of Economics (TSE), revised Nov 2013.
- José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Banco de Espaï¿½a Occasional Papers 0501, Banco de Espa�a.
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Serie Research Memoranda
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- Lescourret, Laurence & Robert, Christian Y., 2011. "Transparency matters: Price formation in the presence of order preferencing," Journal of Financial Markets, Elsevier, vol. 14(2), pages 227-258, May.
- Lescourret, Laurence & Robert, Christian Y., 2006. "Preferencing, internalization and inventory position," ESSEC Working Papers DR 06017, ESSEC Research Center, ESSEC Business School.
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