Bid-Ask Price Competition with Asymmetric Information between Market Makers

Riccardo Calcagno and Stefano M. Lovo
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Stefano M. Lovo: UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)

No 1998012, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

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 model is presented where two market makers with two different information partitions compete in prices. At each stage a bid-ask auction between the market makers occur, and the winner trades the asset against liquidity traders. We show that equilibrium prices do not convey all the information present in the market until the last stage. Moreover, we characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's expected equilibrium payoffs depends on the beliefs of the market at the beginning of the game.

Keywords: bid-ask prices; asymmetric information; repeated auction; insider trading (search for similar items in EconPapers)
JEL-codes: D44 D82 G10 G14 (search for similar items in EconPapers)
Pages: 16
Date: 1998-05-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:1998012

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