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A Dynamic Model of an Imperfectly Competitive Bid-Ask Market

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Author Info

  • Dimitri Vayanos

Abstract

This paper studies a dynamic model of an imperfectly competitive bid- ask market with a few large and many small traders. Large traders are risk- averse and exchange a risky asset for hedging purposes. The only private information in the model concerns their hedging demands. We find that large traders trade quickly when there are many small traders in the market, and do so at a decreasing rate over time. With fewer small traders they trade more slowly at an increasing and then at a decreasing rate, and the outcome is much more inefficient than what static double auction models predict. We also find that if the market clears more frequently, large traders trade faster if there are many small traders and vice- versa. Finally large traders are better off if information regarding their hedging demands is publicly known, when they account for a substantial part of the trading volume.

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Bibliographic Info

Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ in its series CEPR Financial Markets Paper with number 0040.

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Date of creation: Oct 1993
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Availability: in print
Handle: RePEc:cpr:ceprfm:0040

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Related research

Keywords: Financial Market; Lay Traders; Repeated Trade; Allocational Efficiency; Competitive Market Making; Rational Expectations;

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Cited by:
  1. Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc.

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