Bid-Ask Price Competition with Asymmetric Information between Market-Makers
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.
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|Date of creation:||01 Apr 2006|
|Publication status:||Published in The Review of Economic Studies, 2006, Vol.72,n°2, pp.329-355|
|Note:||View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00460018|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
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