Intertemporal price discovery by market makers: Active versus passive learning
AbstractThis paper examines the role of the market maker in intertemporal price formation in securities market. We argue that the market maker, in performing the critical function of price discovery, may set prices in a dynamic context that would be suboptimal in a single period context in order to learn more from the resulting order flow. Such actions constitute an investment in the production of information. Necessary and sufficient conditions for the existence of such price strategies are developed and several examples are presented.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Intermediation.
Volume (Year): 2 (1992)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/inca/622875
Other versions of this item:
- Leach, J.C. & Madhavan, A.N., 1990. "Intertemporal Price Discovery By Market Makers: Active Versus Passive Learning," Weiss Center Working Papers 15-90, Wharton School - Weiss Center for International Financial Research.
- Chris J. Leach & Ananth N. Madhavan, . "Intertemporal Price Discovery by Market Makers: Active versus Passive Learning," Rodney L. White Center for Financial Research Working Papers 15-90, Wharton School Rodney L. White Center for Financial Research.
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- Taylor, Mark P. & Schmidt, Markus & Reitz, Stefan, 2007. "End-user order flow and exchange rate dynamics," Discussion Paper Series 1: Economic Studies 2007,05, Deutsche Bundesbank, Research Centre.
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- Scalia, Antonio, 1998. "Information transmission and causality in the Italian Treasury bond market," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 361-384, October.
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