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Bid-ask price competition with asymmetric information between market makers

Author

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  • CALCAGNO, Riccardo

    () (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • LOVO, Stefano M.

    () (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

We consider the effect of asymmetric information on price formation process in a financial market where private information is held by a market maker. A Bayesian game is proposed in which there is price competition between two market makers with two different information partitions. At each stage players set bid and ask prices simultaneously and then trade occurs between market maker who proposes the most profitable price and liquidity traders. We characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's equilibrium payoffsare proportional to prior beliefs of the market.

Suggested Citation

  • CALCAGNO, Riccardo & LOVO, Stefano M., 1998. "Bid-ask price competition with asymmetric information between market makers," CORE Discussion Papers 1998016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1998016
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1998.html
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    References listed on IDEAS

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    6. Hendricks, Kenneth & Porter, Robert H & Wilson, Charles A, 1994. "Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price," Econometrica, Econometric Society, vol. 62(6), pages 1415-1444, November.
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    Cited by:

    1. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    2. Attilio Gardini & Giuseppe Cavaliere & Michele Costa, 1999. "A new approach to stock price modelling and the efficiency of the Italian stock exchange," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 8(1), pages 25-47, April.
    3. Hadiza Moussa Saley & Bernard De Meyer, 2003. "On the strategic origin of Brownian motion in finance," International Journal of Game Theory, Springer;Game Theory Society, vol. 31(2), pages 285-319.

    More about this item

    Keywords

    bid ask; asymmetric information; repeated auction; insider trading.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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