How do designated market makers create value for small-caps?

Albert Menkveld and Ting Wang

Journal of Financial Markets, 2013, vol. 16, issue 3, 571-603

Abstract: A poor liquidity level and a high liquidity risk significantly raise the required return for small-cap stocks. Euronext allows these firms to hire designated market makers (DMMs) who guarantee a minimum liquidity supply for a lump sum annual fee. In an event study based on 74 DMM stocks, we find that the contract improves liquidity level, reduces liquidity risk, and generates an average abnormal return of 3.5%. DMMs participate in more trades and incur a trading loss on high quoted-spread days (days when their constraint is likely to bind). Finally, DMMs reduce the size of pricing errors.

Keywords: Designated market maker; Liquidity; Liquidity risk; Small-caps; Abnormal returns (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:3:p:571-603

DOI: 10.1016/j.finmar.2012.12.003

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