A Bayesian Model of Intraday Specialist Pricing
AbstractWe develop and test a model of intraday price formation based on an explicit description of a representative market maker whose beliefs evolve according to Bayes’ rule. We derive an estimating equation where the weight the market maker places on the order flow as an information signal can be recovered from the parameter estimates. This weight is a natural measure of information asymmetry since it is the ratio of the quality of private information to the quality of public information. The model is interesting for other reasons as well. First, the model encompasses several other models of intraday price formation. Second, the error term arises endogenously and possesses a natural economic interpretation. Third, the model permits us to partially distinguish the price effects of information asymmetry and inventory control by market makers. Fourth, the model provides a method to assess the implicit costs of trading. We show that there are substantial non-linearities in pricing that may reflect the way in which large blocks are traded in the upstairs market. We estimate the model with a new data set obtained from a NYSE specialist. The data set comprises almost 75,000 records for most of the year 1987 and is o independent interest given the paucity of inventory data. The results provide strong support of information asymmetries, as perceived by the market.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 02-91.
Date of creation:
Date of revision:
Contact details of provider:
Postal: 3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367
Phone: (215) 898-7616
Fax: (215) 573-8084
Web page: http://finance.wharton.upenn.edu/~rlwctr/
More information through EDIRC
Other versions of this item:
- Ananth Madhavan & Seymour Smidt, . "A Bayesian Model of Intraday Specialist Pricing," Rodney L. White Center for Financial Research Working Papers 2-91, Wharton School Rodney L. White Center for Financial Research.
- Madhavan, A. & Smidt, S., 1991. "A Baysian Model of Intraday Specialist Pricing," Weiss Center Working Papers 2-91, Wharton School - Weiss Center for International Financial Research.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.