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Bid-Ask Price Competition with Asymmetric Information between Market Makers

Author

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  • Calcagno, Riccardo

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

  • Lovo, Stefano M.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

Abstract

We consider the effect of asymmetric information on price formation process in a financial market where private information is held by a market maker. A model is presented where two market makers with two different information partitions compete in prices. At each stage a bid-ask auction between the market makers occur, and the winner trades the asset against liquidity traders. We show that equilibrium prices do not convey all the information present in the market until the last stage. Moreover, we characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's expected equilibrium payoffs depends on the beliefs of the market at the beginning of the game.

Suggested Citation

  • Calcagno, Riccardo & Lovo, Stefano M., 1998. "Bid-Ask Price Competition with Asymmetric Information between Market Makers," LIDAM Discussion Papers IRES 1998012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1998012
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/9812.ps
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    Citations

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    Cited by:

    1. Chang, Sanders S. & Wang, F. Albert, 2015. "Adverse selection and the presence of informed trading," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 19-33.
    2. Hadiza Moussa Saley & Bernard De Meyer, 2003. "On the strategic origin of Brownian motion in finance," International Journal of Game Theory, Springer;Game Theory Society, vol. 31(2), pages 285-319.
    3. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    4. Calcagno, R. & Lovo, S.M., 2002. "Market Efficiency and Price Formation When Dealers are Asymmetrically Informed," Discussion Paper 2002-42, Tilburg University, Center for Economic Research.
    5. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.
    6. Arzé Karam, 2022. "Dealers' incentives to reveal their names," The Financial Review, Eastern Finance Association, vol. 57(1), pages 27-44, February.
    7. Schweinzer, Paul, 2006. "Sequential bargaining with pure common values," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 137, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. Shino Takayama, 2013. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 492, School of Economics, University of Queensland, Australia.
    9. Shino Takayama, 2018. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 603, School of Economics, University of Queensland, Australia.
    10. Calcagno, R. & Lovo, S.M., 2002. "Market Efficiency and Price Formation When Dealers are Asymmetrically Informed," Other publications TiSEM 30951a58-24f2-43f0-9e35-e, Tilburg University, School of Economics and Management.
    11. Attilio Gardini & Giuseppe Cavaliere & Michele Costa, 1999. "A new approach to stock price modelling and the efficiency of the Italian stock exchange," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 8(1), pages 25-47, April.
    12. LOVO, Stefano M. & CALCAGNO, R., 2001. "Market efficiency and Price Formation when Dealers are Asymmetrically Informed," HEC Research Papers Series 737, HEC Paris.

    More about this item

    Keywords

    bid-ask prices; asymmetric information; repeated auction; insider trading;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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