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Limited disclosure and hidden orders in asset markets

Author

Listed:
  • Monnet, Cyril
  • Quintin, Erwan

Abstract

Opacity assumes at least two prominent forms in asset markets. Dark exchanges and over-the-counter markets enable expert investors to hide their orders while originators carefully control the disclosure of fundamental information about the assets they source. We describe a simple model in which both forms of opacity – hidden orders and limited disclosure – complement one another. Costly investor expertise gives originators incentives to deliver assets of good quality. Keeping expert orders hidden generates the rents investors need to justify investing in expertise in the first place. Limiting disclosure mitigates the resulting adverse selection issues. Originators prefer to restrict the information they can convey to experts because it encourages the participation of non experts. This optimal organization of asset markets can be decentralized using standard financial arrangements.

Suggested Citation

  • Monnet, Cyril & Quintin, Erwan, 2017. "Limited disclosure and hidden orders in asset markets," Journal of Financial Economics, Elsevier, vol. 123(3), pages 602-616.
  • Handle: RePEc:eee:jfinec:v:123:y:2017:i:3:p:602-616
    DOI: 10.1016/j.jfineco.2016.04.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Market design; Opacity; Asymmetric information;

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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