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Transparency, Liquidity and Price Formation

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  • Rindi, Barbara

    (Bocconi University, Italy)

Abstract

This paper shows that the results on market transparency from previous literature are reversed when allowing for endogenous information acquisition: transparency reduces liquidity. Most theoretical models demonstrate that transparency enhances liquidity, whilst the results obtained so far by empirical and experimental works have been ambiguous. This paper shows how transparency a .ects the quality of financial markets. We model the market for a risky asset as an open limit-order book and compare three regimes of pre-trade transparency: under full transparency agents can observe the order flow and traders' personal identifiers.

Suggested Citation

  • Rindi, Barbara, 2002. "Transparency, Liquidity and Price Formation," Royal Economic Society Annual Conference 2002 159, Royal Economic Society.
  • Handle: RePEc:ecj:ac2002:159
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    References listed on IDEAS

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    8. Schlicht, Ekkehart, 1975. "A Neoclassical Theory of Wealth Distribution," Munich Reprints in Economics 3386, University of Munich, Department of Economics.
    9. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    10. Bourguignon, Francois, 1981. "Pareto Superiority of Unegalitarian Equilibria in Stiglitz' Model of Wealth Distribution with Convex Saving Function," Econometrica, Econometric Society, vol. 49(6), pages 1469-1475, November.
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    12. Spanos,Aris, 1986. "Statistical Foundations of Econometric Modelling," Cambridge Books, Cambridge University Press, number 9780521269124, December.
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    Cited by:

    1. Phuong Pham, Thu & Joakim Westerholm, P., 2013. "An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 202-223.
    2. Degryse, H.A. & van Achter, M. & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-002, Tilburg University, Center for Economic Research.
    3. Thierry Foucault & Sophie Moinas & Erik Theissen, 2007. "Does Anonymity Matter in Electronic Limit Order Markets?," Review of Financial Studies, Society for Financial Studies, pages 1707-1747.
    4. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2009. "Dynamic order submission strategies with competition between a dealer market and a crossing network," Journal of Financial Economics, Elsevier, vol. 91(3), pages 319-338, March.
    5. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," CORE Discussion Papers 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Thu Phuong Pham, 2015. "Broker ID transparency and price impact of trades: evidence from the Korean Exchange," International Journal of Managerial Finance, Emerald Group Publishing, vol. 11(1), pages 117-131, February.
    7. Pham, Thu Phuong & Westerholm, P. Joakim, 2013. "A survey of research into broker identity and limit order book," Working Papers 17212, University of Tasmania, Tasmanian School of Business and Economics, revised 16 Oct 2013.
    8. Eom, Kyong Shik & Ok, Jinho & Park, Jong-Ho, 2007. "Pre-trade transparency and market quality," Journal of Financial Markets, Elsevier, vol. 10(4), pages 319-341, November.
    9. Anand, Amber & Weaver, Daniel G., 2004. "Can order exposure be mandated?," Journal of Financial Markets, Elsevier, vol. 7(4), pages 405-426, October.

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