Intertemporal Price Discovery by Market Makers: Active versus Passive Learning
AbstractThis paper examines the role of the market maker in intertemporal price formation in securities market. We argue that the market maker, in performing the critical function of price discovery, may set prices in a dynamic context that would be suboptimal in a single period context in order to learn more from the resulting order flow. Such actions constitute an investment in the production of information. Necessary and sufficient conditions for the existence of such price strategies are developed and several examples are presented.
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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 15-90.
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- Chris Leach, J. & Madhavan, Ananth N., 1992. "Intertemporal price discovery by market makers: Active versus passive learning," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 207-235, June.
- Leach, J.C. & Madhavan, A.N., 1990. "Intertemporal Price Discovery By Market Makers: Active Versus Passive Learning," Weiss Center Working Papers 15-90, Wharton School - Weiss Center for International Financial Research.
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- Carol Osler & Alexander Mende & Lukas Menkhoff, 2010.
"Price Discovery in Currency Markets,"
03, Brandeis University, Department of Economics and International Businesss School.
- Osler, Carol & Mende, Alexander & Menkhoff, Lukas, 2006. "Price Discovery in Currency Markets," Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover dp-351, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Victoria Saporta & Giorgio Trebeschi & Anne Vila, 1999. "Price formation and transparency on the London Stock Exchange," Bank of England working papers 95, Bank of England.
- Vitale, Paolo, 1998. "Two months in the life of several gilt-edged market makers on the London Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 299-324, December.
- Taylor, Mark P. & Schmidt, Markus & Reitz, Stefan, 2007. "End-user order flow and exchange rate dynamics," Discussion Paper Series 1: Economic Studies 2007,05, Deutsche Bundesbank, Research Centre.
- Scalia, Antonio, 1998. "Information transmission and causality in the Italian Treasury bond market," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 361-384, October.
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