Intertemporal Price Discovery by Market Makers: Active versus Passive Learning

Chris J. Leach and Ananth Madhavan

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: This paper examines the role of the market maker in intertemporal price formation in securities market. We argue that the market maker, in performing the critical function of price discovery, may set prices in a dynamic context that would be suboptimal in a single period context in order to learn more from the resulting order flow. Such actions constitute an investment in the production of information. Necessary and sufficient conditions for the existence of such price strategies are developed and several examples are presented.

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Related works:
Journal Article: Intertemporal price discovery by market makers: Active versus passive learning (1992)
Working Paper: INTERTEMPORAL PRICE DISCOVERY BY MARKET MAKERS: ACTIVE VERSUS PASSIVE LEARNING (1990)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:pennfi:15-90

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