Giffen goods and market making
AbstractThis paper shows that information effects per se are not responsible for the Giffen goods anomaly affecting traders’ demands in multi asset noisy, rational expectations equilibrium markets. The role that information plays in traders’ strategies also matters. In a market with risk averse, uninformed traders, informed agents have a dual trading motive: speculation and market making. The former entails using prices to assess the effect of error terms; the latter requires employing them to disentangle noise traders’ demands within aggregate orders. In a correlated environment this complicates the signal extraction problem and may generate upward sloping demand curves. Assuming (i) that competitive, risk neutral market makers price the assets or that (ii) uninformed traders’ risk tolerance coefficient grows unboundedly, removes the market making component from informed traders’ demands rendering them well behaved in prices. Copyright Springer-Verlag Berlin/Heidelberg 2005
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 25 (2005)
Issue (Month): 4 (06)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Giovanni Cespa, 2002. "Giffen goods and market making," Economics Working Papers 681, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2003.
- Giovanni Cespa, 2003. "Giffen Goods and Market Making," CSEF Working Papers 97, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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