Decision Rules and their Influence on Asset Prices
AbstractThis paper develops a market microstructure model with asymmetric information in order to quantify the influence which practical decision rules have on asset process. The users of practical decision rules have incomplete information at their disposal and trade in a market with both fully informed and uninformed investors, as well as with a competitive market maker. The users of practical decision rules affect the periodical ask and bid prices in two ways: by means of the precision of their information and through their share in the totality of investors, respectively. The resulting bid-ask spread is positive and proportional to the c.p. variation of these two influencing factors and is attributable to the adverse selection costs.
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Bibliographic InfoPaper provided by Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) in its series Darmstadt Discussion Papers in Economics with number 37211.
Date of creation: Sep 2004
Date of revision:
Publication status: Published in Darmstadt Discussion Papers in Economics . 139 (2004-09)
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