Quotes, Prices, and Estimates in a Laboratory Market
This study examines the behavior of laboratory markets in which two uninformed marketmakers compete to trade with heterogeneously informed investors. The data provide three main results. First, marketmakers set quotes to protect against adverse selection and to control inventory. Second, when investors are 1ess well-informed, their trades are less reliable measures of their information, and marketmakers respond to those trades with greater skepticism. Third, errors in marketmakers' reactions to trades cause the time-series behavior of quotes and prices to depend on the information environment in ways beyond those captured in extant theory. Copyright 1996 by American Finance Association.
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Volume (Year): 51 (1996)
Issue (Month): 5 (December)
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