Auction Markets, Dealership Markets and Execution Risk
Dealers are suppliers of liquidity; in this respect their role is similar to that played by speculators in auction markets. However, dealers are a special kind of speculator, because of the many obligations and privileges conferred upon them. The most obvious constraint on dealers' behaviour is their obligation to quote firm prices publicly; this implies that, in contrast with what happens on auction markets, traders are insured against execution risk, i.e., the risk of finding few or no counterparty to trade. The normative issue then is: when is it efficient for customers to buy insurance from dealers rather than bearing execution risk themselves? In our model the relevant condition is that dealers must be sufficiently less risk-averse than their customers. The dealership market is superior if dealers are risk-neutral and customers are risk- averse, while it is dominated by the auction market if dealers have the same degree of risk aversion as their customers. There is also an intermediate region of parameter values where the comparison between the two systems is ambiguous: if the fundamental risk of the security is low, the dealership mechanism dominates the auction, while for high-risk securities the reverse is true.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Nov 1990|
|Date of revision:|
|Contact details of provider:|| Phone: 44 - 20 - 7183 8801|
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprfm:0008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.