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Transparency, Liquidity and Price Formation

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Author Info
Rindi, Barbara (Bocconi University, Italy)

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Abstract

This paper shows that the results on market transparency from previous literature are reversed when allowing for endogenous information acquisition: transparency reduces liquidity. Most theoretical models demonstrate that transparency enhances liquidity, whilst the results obtained so far by empirical and experimental works have been ambiguous. This paper shows how transparency a .ects the quality of financial markets. We model the market for a risky asset as an open limit-order book and compare three regimes of pre-trade transparency: under full transparency agents can observe the order flow and traders' personal identifiers.

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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 159.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:159

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Web page: http://www.res.org.uk/society/annualconf.asp
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  1. Degryse, H.A. & Achter, M. van & Wuyts, G., 2007. "Dynamic Order Submission Strategies with Competition between a Dealer Market and a Crossing Network," Discussion Paper 2007-017, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  2. Foucault, Thierry & Moinas, Sophie & Theissen, Erik, 2003. "Does Anonymity Matter in Electronic Limit Order Markets?," CEPR Discussion Papers 4091, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," CORE Discussion Papers 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  4. Degryse, H.A., 2007. "Competition on Financial Markets: Does Market Design Matter?," Discussion Paper 2007-004, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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