 A Dynamic Model of an Imperfectly Competitive Bid-Ask MarketCEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX. Abstract: This paper studies a dynamic model of an imperfectly competitive bid- ask market with a few large and many small traders. Large traders are risk- averse and exchange a risky asset for hedging purposes. The only private information in the model concerns their hedging demands. We find that large traders trade quickly when there are many small traders in the market, and do so at a decreasing rate over time. With fewer small traders they trade more slowly at an increasing and then at a decreasing rate, and the outcome is much more inefficient than what static double auction models predict. We also find that if the market clears more frequently, large traders trade faster if there are many small traders and vice- versa. Finally large traders are better off if information regarding their hedging demands is publicly known, when they account for a substantial part of the trading volume. Keywords: Financial Market; Lay Traders; Repeated Trade; Allocational Efficiency; Competitive Market Making; Rational Expectations (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprfm:0040 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX. |
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