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Market Making, Prices, and Quantity Limits

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  • Dupont, Dominique

Abstract

This article develops a model of spread and depth setting under asymmetric information where the equilibrium depth is proportionally more sensitive than the spread to changes in the degree of information asymmetry. The analysis uses a one-period model in which a risk-neutral, monopolistic market maker faces a price-sensitive liquidity trader and a better informed trader who is alternatively risk neutral and risk averse. The equilibrium depth can take values ranging from 0 to infinity, depending on the information asymmetry, the asset volatility, and the strength of the liquidity demand, while the spread remains positive and finite. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Dupont, Dominique, 2000. "Market Making, Prices, and Quantity Limits," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1129-1151.
  • Handle: RePEc:oup:rfinst:v:13:y:2000:i:4:p:1129-51
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    Citations

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    Cited by:

    1. Gajewski, Jean-François & Quéré, Bertrand ¨P., 2013. "A Comparison of the Effects of Earnings Disclosures on Information Asymmetry: Evidence from France and the U.S," The International Journal of Accounting, Elsevier, vol. 48(1), pages 1-25.
    2. Laivi Laidroo, 2011. "Market Liquidity and Public Announcements' Disclosure Quality on Tallinn, Riga, and Vilnius Stock Exchanges," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 54-79, July.
    3. George Tannous & Juan Wang & Craig Wilson, 2013. "The Intraday Pattern of Information Asymmetry, Spread, and Depth: Evidence from the NYSE," International Review of Finance, International Review of Finance Ltd., vol. 13(2), pages 215-240, June.
    4. Barakat, Ahmed & Chernobai, Anna & Wahrenburg, Mark, 2014. "Information asymmetry around operational risk announcements," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 152-179.
    5. Dionigi Gerace & Qigui Liu & Gary Gang Tian & Willa Zheng, 2015. "Call Auction Transparency and Market Liquidity: Evidence from China," International Review of Finance, International Review of Finance Ltd., vol. 15(2), pages 223-255, June.
    6. repec:uts:finphd:34 is not listed on IDEAS
    7. Frino, Alex & Gerace, Dionigi & Lepone, Andrew, 2008. "Liquidity in auction and specialist market structures: Evidence from the Italian bourse," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2581-2588, December.
    8. Fishe, Raymond P. H. & Robe, Michel A., 2004. "The impact of illegal insider trading in dealer and specialist markets: evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 71(3), pages 461-488, March.
    9. Bulent Koksal, 2011. "NYSE Specialists' Participation in the Posted Quotes," European Journal of Economic and Political Studies, Fatih University, vol. 4(1), pages 13-25.
    10. Alex Frino & Riccardo Palumbo & Francesco Capalbo & Dionigi Gerace & Vito Mollica, 2013. "Information Disclosure and Stock Liquidity: Evidence from Borsa Italiana," Abacus, Accounting Foundation, University of Sydney, vol. 49(4), pages 423-440, December.
    11. Laivi Laidroo, 2011. "Market Liquidity and Public Announcements' Disclosure Quality on Tallinn, Riga, and Vilnius Stock Exchanges," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 54-79, July.
    12. Köksal, Bülent, 2010. "Participation strategy of the NYSE specialists to the posted quotes," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 314-331, December.
    13. Bülent, Köksal, 2008. "Participation Strategy of the NYSE Specialists to the Trades," MPRA Paper 30512, University Library of Munich, Germany.
    14. Alasdair Brown & Fuyu Yang, 2015. "Adverse Selection, Speed Bumps and Asset Market Quality," University of East Anglia Applied and Financial Economics Working Paper Series 070, School of Economics, University of East Anglia, Norwich, UK..

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