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Dividing the Pie

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Author Info
Flood, M.D.
Koedijk, C.G.
Dijk, M.A. van
Leeuwen, I.W. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency.

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File URL: http://hdl.handle.net/1765/248
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Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2002-101-F&A Revision_Date: 2009-10-07.

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Date of creation: 29 Oct 2002
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Handle: RePEc:dgr:eureri:2002257

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Related research
Keywords: financial markets; market microstructure; experimental economics; information asymmetry;

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References listed on IDEAS
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  1. Julian Franks & Stephen Schaefer, 1995. "Equity Market Transparency On The London Stock Exchange," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 70-78. [Downloadable!] (restricted)
  2. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  3. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June. [Downloadable!] (restricted)
  4. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 5-35.
  5. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 579-603. [Downloadable!] (restricted)
  6. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
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  7. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-67, May. [Downloadable!] (restricted)
  8. Benveniste, Lawrence M. & Marcus, Alan J. & Wilhelm, William J., 1992. "What's special about the specialist?," Journal of Financial Economics, Elsevier, vol. 32(1), pages 61-86, August. [Downloadable!] (restricted)
  9. Copeland, Thomas E & Friedman, Daniel, 1991. " Partial Revelation of Information in Experimental Asset Markets," Journal of Finance, American Finance Association, vol. 46(1), pages 265-95, March. [Downloadable!] (restricted)
  10. Madhavan, Ananth & Cheng, Minder, 1997. "In Search of Liquidity: Block Trades in the Upstairs and Downstairs Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 175-203.
  11. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-41, June. [Downloadable!] (restricted)
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  12. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December. [Downloadable!] (restricted)
  13. Baltagi, Badi H. & Boozer, Michael A., 1997. "Econometric Analysis of Panel Data," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October. [Downloadable!]
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