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Price formation in markets with trading delays

Gabor Pinter and Semih Üslü

No 1023, Bank of England working papers from Bank of England

Abstract: We develop a parsimonious price formation model to study information aggregation and information acquisition in the presence of trading delays. If delays apply uniformly to uninformed and informed traders, the level of delays does not affect information aggregation. Traders’ information acquisition incentives are, however, weaker in a market with longer delays. Therefore, the equilibrium fraction of informed traders is lower if delays are longer, establishing an inverse relationship between trading delays and price informativeness. We also show that risk premia and price dispersion tend to be non-monotonic functions of the level of delays when information acquisition is endogenous. We document novel empirical evidence from the UK corporate bond market, which largely corroborates the implications of our theory.

Keywords: Trading frictions; trading delays; price informativeness; information aggregation; information acquisition; liquidity (search for similar items in EconPapers)
JEL-codes: D49 D53 D82 D83 G11 G12 G14 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2023-06-22
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1023

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