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

Riccardo Calcagno and Stefano Lovo
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Riccardo Calcagno: VU - Vrije Universiteit Amsterdam [Amsterdam]

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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.

Date: 2006-04-01
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Citations: View citations in EconPapers (14)

Published in Review of Economic Studies, 2006, 73 (255), 329-355 p

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Related works:
Journal Article: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02313019

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