Market Makers, Asymmetric Information and Price Information PDF Download

Author: Richard R. Lindsey
Publisher:
ISBN:
Category : Securities
Languages : en
Pages : 30

View

Book Description

Author: Markus Konrad Brunnermeier
Publisher: Oxford University Press, USA
ISBN: 9780198296980
Category : Business & Economics
Languages : en
Pages : 264

View

Book Description
The role of information is central to the academic debate on finance. This book provides a detailed, current survey of theoretical research into the effect on stock prices of the distribution of information, comparing and contrasting major models. It examines theoretical models that explain bubbles, technical analysis, and herding behavior. It also provides rational explanations for stock market crashes. Analyzing the implications of asymmetries in information is crucial in this area. This book provides a useful survey for graduate students.

Author: Galen Raymond Sevcik
Publisher:
ISBN:
Category :
Languages : en
Pages : 354

View

Book Description

Author: James McLoughlin
Publisher:
ISBN:
Category :
Languages : en
Pages : 170

View

Book Description
Financial intermediaries play an important role in the pricing of financial assets. For example, intermediaries may act on behalf of consumers in deciding how their wealth is invested, or they may act as providers of liquidity. This dissertation explores several ways in which intermediaries impact price informativeness, the transaction costs investors incur, and investor welfare. In the first chapter, I examine how prices reveal information when intermediaries are informed. Using a model of repeated trade between a long-lived, informed, price-discriminating market maker and risk averse traders with endogenous hedging demands, I first show that traders are weakly better off trading with an informed dealer, as they may learn something about an asset's value in the process of transacting. Second, while long-term incentives can induce an informed market maker to honestly reveal information and increase risk-sharing, they also enable the market maker to hide her information and extract more rents, reducing price informativeness. This less desirable outcome dominates with respect to both the parameter space and a selection criterion. Finally, measures of market quality, such as the transient component of price volatility (illiquidity), may not accurately reflect welfare. The second chapter discusses how relationships affect prices when intermediaries are concerned about adverse selection. When counter-parties trade in OTC markets, such as those for corporate bonds or derivatives, the lack of anonymity implies that future terms of trade can influence prices today. Using a model of repeated trade between an informed trader and uninformed market makers, I show that information asymmetry can affect the markups charged by dealers in two ways. First, for a given market structure (number of market makers), traders with more private information incur lower trading costs because dealers offer better terms to mitigate adverse selection. Second, even when dealers can not compete directly on price quotes, they compete indirectly by improving the informed trader's outside option, though this competition is imperfect. While repeated trade allows two given counter-parties to ameliorate adverse selection, the maximum number of dealers, and hence the total gains achievable, are limited by information frictions. An empirical implication is that the comparative statics of transaction costs only make sense conditional on market structure. The third chapter considers the effect intermediaries have as financial advisors, and whether measures of their performance as mutual fund managers accurately reflect the value they add to an economy. Relative to the existing literature, I look at how the presence of mutual funds affects the price of the underlying asset in an economy. Once this pricing effect is accounted for, I show that standard measures of mutual fund performance may not accurately reflect whether fund management is welfare improving.

Author: Richard Ray Lindsey
Publisher:
ISBN:
Category :
Languages : en
Pages : 412

View

Book Description

Author: Carolyn Sissoko
Publisher:
ISBN:
Category :
Languages : en
Pages : 49

View

Book Description
This paper studies the problem of asymmetric information that exists in financial markets between the public and the market makers, that is, the securities dealers who support the stability of asset prices by carrying inventory over short periods of time. Market makers in modern markets typically have access to information about a broad range of markets and trade on the basis of this information. While trade on fundamental information about the value of assets is necessary for asset prices to be informative, trade on market information, such as the presence in the market of a highly motivated seller, often does not make prices more informative. Modern regulation in the U.S. has generally taken a permissive approach both to trading on market information, and also to the proliferation of conflicts of interest that increase profit opportunities from trading on market information. This paper critiques this regulatory approach by explaining that economic theory does not in general indicate that there are efficiency gains from permitting trading on market information, by describing an alternate model of a financial market, the pre-1986 London Stock Exchange which required dealers to avoid conflicts of interest and limited trading on market information by not making public the size of trades, and by discussing recent scandals that illustrate the costs of trading on market information.The costs and benefits of trading on market information are very difficult to measure because of the absence of benchmark prices against which the prices that are observed in markets can be compared. One proxy for measuring the net costs of such trading is the aggregate cost of financial intermediation: if this falls during a time period when conflicts of interest and opportunities to trade on market information have increased, then one might conclude that the consequences of trading on such information are unlikely to be large. In fact, over the relevant time period there was a dramatic increase in the costs of financial intermediation. While recognizing that the evidence offered here of social cost created by trading on market information is far from conclusive, this paper proposes two policies that could mitigate such costs: a requirement that market makers avoid conflicts of interest, and the non-release of some intraday market data to reduce the market information on which trade can take place.

Author: Evelyn Rill
Publisher: GRIN Verlag
ISBN: 3668080305
Category : Political Science
Languages : en
Pages : 40

View

Book Description
Bachelor Thesis from the year 2015 in the subject Business economics - Economic Policy, grade: 1,3, University of Frankfurt (Main) (Faculty of Economics and Business Administration), course: Chair of Corporate Finance, language: English, abstract: Due to the importance of inventories and the fact that asymmetric information models are extensively discussed in literature, this thesis exclusively focuses on inventory control models and provides a survey of theory and empirical results on the role of inventory in the price formation process. Because most of the relevant literature is based on the U.S. exchange market, this thesis is mainly confined on inventory control of specialists on the New York Stock Exchange (NYSE) and of dealers on the National Association of Securities Dealers (NASDAQ). To understand the costs of holding inventory, Section 2 introduced three important drivers of inventory: capital constraints, liquidity and volatility. Section 3 summarises the effect of market maker inventory and its costs on liquidity and how this affects the bid-ask spread. In Section 4, the impact of inventory on asset prices, especially of inventory levels, is discussed in more detail. Section 5 briefly turns to changes in market structure and how they affect the role of traditional market makers and their inventories. Section 6 finally concludes.

Author: Riccardo Calcagno
Publisher:
ISBN:
Category :
Languages : en
Pages : 33

View

Book Description

Author: Hong Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 55

View

Book Description
Market makers in some financial markets often make offsetting trades and have significant market power. We develop a market making model that captures these market features as well as other important characteristics such as information asymmetry and inventory risk. In contrast to the existing literature, a market maker in our model can optimally shift some trades with some investors to other investors by adjusting bid or ask. As a result, we find that consistent with empirical evidence, expected bid-ask spreads may decrease with information asymmetry and bid-ask spreads can be positively correlated with trading volume.

Author: Hendrik Bessembinder
Publisher:
ISBN:
Category :
Languages : en
Pages : 66

View

Book Description
While some financial markets increasingly rely on endogenous liquidity provision by ldquo;high frequencyrdquo; traders, others also contract with ldquo;designated market makersrdquo; who commit to provide more liquidity than they would otherwise choose. We identify two reasons that such affirmative obligations can improve value. The first relies on the insight that the asymmetric information component of market-making costs comprises a transfer across traders, not a social cost to completing trades. As such, this cost dissuades efficient trading, which a restriction on spread widths encourages. Secondly, a restriction on spread widths encourages more traders to become informed, which speeds the rate at which market prices move toward true asset values. This analysis implies that designated market makers can enhance efficiency primarily when actual or perceived information asymmetries are important, not simply when liquidity is expensive or trading is sparse. As the ldquo;flash crashrdquo; of May 2010 has been attributed to the withdrawal of endogenous liquidity in response to perceived increases in information asymmetries, our analysis implies that future flash crashes can be avoided and social welfare enhanced by designating market makers.