Market efficiency and Price Formation when Dealers are Asymmetrically Informed
Stefano M. Lovo and
No 737, HEC Research Papers Series from HEC Paris
We consider the effect of asymmetric information on price formation process in a quote-driven market where one market maker receives a private signal on the security's fundamental. A model is presented where market makers repeatedly compete in prices: at each stage a bid-ask auction occurs and the winner trades the security against liquidity traders. We show that at equilibrium the market is not strong-form efficient until the last stage. We characterize a reputational equilibrium in which the informed market maker will aspect market beliefs, possibly misleading them, in the sense that he will push the uninformed participants to think the value of the risky asset is different from the realized one. At this equilibrium a price leadership effect arises, quotes are never equal to the expected value of the asset given the public information, the informed market maker expected payoff is positive and the information revelation speed is slower than in an analogous order-driven market.
Keywords: bid-ask prices; asymmetric information; repeated auction; insider trading (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 42 pages
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
http://www.hec.fr/var/fre/storage/original/applica ... f0cc31e7b661efbe.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0737
Access Statistics for this paper
More papers in HEC Research Papers Series from HEC Paris HEC Paris, 78351 Jouy-en-Josas cedex, France. Contact information at EDIRC.
Bibliographic data for series maintained by Antoine Haldemann ().