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 - Weiss Center for International Financial Research in its series Weiss Center Working Papers with number 15-90.
Length: 28 pages
Date of creation: 1990
Date of revision:
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Web page: http://finance.wharton.upenn.edu/weiss/
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securities ; financial market ; prices ; economic models;
Other versions of this item:
- 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.
- Chris J. Leach & Ananth N. Madhavan, . "Intertemporal Price Discovery by Market Makers: Active versus Passive Learning," Rodney L. White Center for Financial Research Working Papers 15-90, Wharton School Rodney L. White Center for Financial Research.
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- Osler, Carol L. & Mende, Alexander & Menkhoff, Lukas, 2011.
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