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The Microeconomics of Market Making Author info | Abstract | Publisher info | Download info | Related research | Statistics O'Hara, Maureen
Oldfield, George S.
This paper examines the influence of risk aversion on the pricing policies of a market maker for securities. It is shown that a market maker's bid-ask spread can be decomposed into a portion for the known limit orders, a risk-neutral adjustment for expected market orders, and a risk adjustment for market order and inventory value uncertainty. It is demonstrated that a risk-averse market maker may set a smaller spread than a risk-neutral specialist. Finally, this paper demonstrates the pervasive role of inventory in affecting both the placement and size of the spread.
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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis .
Volume (Year): 21 (1986)
Issue (Month): 04 (December)
Pages: 361-376
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Handle: RePEc:cup:jfinqa:v:21:y:1986:i:04:p:361-376_01Contact details of provider: Postal: The Edinburgh Building, Shaftesbury Road, Cambridge CB2 2RU UK Fax: +44 (0)1223 325150 Email: Web page: http://journals.cambridge.org/jid_JFQ
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