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Bid-Ask Price Competition with Asymmetric Information between Market-Makers

Author

Listed:
  • Stefano Lovo

    () (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Ricardo Calcagno

Abstract

This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.

Suggested Citation

  • Stefano Lovo & Ricardo Calcagno, 2006. "Bid-Ask Price Competition with Asymmetric Information between Market-Makers," Post-Print hal-00460018, HAL.
  • Handle: RePEc:hal:journl:hal-00460018
    Note: View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00460018
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    Citations

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    Cited by:

    1. Schweinzer, Paul, 2006. "Sequential bargaining with pure common values," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 137, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Shino Takayama, 2013. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 492, School of Economics, University of Queensland, Australia.
    3. Chang, Sanders S. & Wang, F. Albert, 2015. "Adverse selection and the presence of informed trading," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 19-33.
    4. repec:eee:jfinec:v:127:y:2018:i:2:p:342-365 is not listed on IDEAS
    5. repec:ebl:ecbull:eb-17-00384 is not listed on IDEAS
    6. 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.
    7. Hörner, Johannes & Lovo, Stefano, 2017. "Belief-free Price Formation," TSE Working Papers 17-790, Toulouse School of Economics (TSE).
    8. Schweinzer, Paul, 2010. "Sequential bargaining with common values," Journal of Mathematical Economics, Elsevier, vol. 46(1), pages 109-121, January.
    9. repec:eee:ecmode:v:66:y:2017:i:c:p:121-131 is not listed on IDEAS
    10. Allen, Linda & Gottesman, Aron A. & Peng, Lin, 2012. "The impact of joint participation on liquidity in equity and syndicated bank loan markets," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 50-78.
    11. Calcagno, R. & Lovo, S.M., 2002. "Market Efficiency and Price Formation When Dealers are Asymmetrically Informed," Discussion Paper 2002-42, Tilburg University, Center for Economic Research.
    12. LOVO, Stefano M. & CALCAGNO, R., 2001. "Market efficiency and Price Formation when Dealers are Asymmetrically Informed," Les Cahiers de Recherche 737, HEC Paris.

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