Risk Aversion, Market Liquidity, and Price Efficiency
A model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse. Market liquidity is found to be nonmonotonic in the number of informed traders, their degree of risk aversion, and the precision of their information. It is also shown that increased liquidity trading leads to reduced price efficiency, and that, under endogenous information acquisition, market liquidity may also be nonmonotonic in the variance of liquidity trades. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Volume (Year): 4 (1991)
Issue (Month): 3 ()
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