Discretionary liquidity trading, information production and market efficiency

Xia Liu, Shancun Liu, Zhen Qi and Chunhui Wen

Finance Research Letters, 2020, vol. 35, issue C

Abstract: We analyze the professionals’ strategies of information production and the consequent market efficiency in the presence of discretionary liquidity trading. A unique equilibrium exists where only parts of discretionary liquidity traders can satisfy their liquidity needs. Instead of competition effect, strategic complementary effect occurs with the production of information by professionals. In particular, with discretionary liquidity trading, increases in the compensation of discretionary liquidity traders and/or the number of professionals promote information production and enhance market liquidity and information efficiency, although price volatility is amplified. This result suggests that regulators should open more access to information production for better market efficiency.

Keywords: Information production; Complimentary effect; Market liquidity; Information Efficiency (search for similar items in EconPapers)
JEL-codes: D8 G1 G2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:35:y:2020:i:c:s1544612318300229

DOI: 10.1016/j.frl.2019.09.014

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