Bid-ask price competition with asymmetric information between market makers

Riccardo Calcagno () and Stefano M. Lovo ()
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Riccardo Calcagno: Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium
Stefano M. Lovo: Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium

No 1998016, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We consider the effect of asymmetric information on price formation process in a financial market where private information is held by a market maker. A Bayesian game is proposed in which there is price competition between two market makers with two different information partitions. At each stage players set bid and ask prices simultaneously and then trade occurs between market maker who proposes the most profitable price and liquidity traders. We characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's equilibrium payoffsare proportional to prior beliefs of the market.

Keywords: bid ask; asymmetric information; repeated auction; insider trading. (search for similar items in EconPapers)
JEL-codes: D44 D82 G10 G14 (search for similar items in EconPapers)
Date: 1998-02-01
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:1998016

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