Bid-Ask Price Competition with Asymmetric Information between Market-Makers

Stefano Lovo and Ricardo Calcagno

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Abstract: This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.

Keywords: Market-makers; Bid-Ask Price; Asymmetric Information (search for similar items in EconPapers)
Date: 2006-04-01
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Citations: View citations in EconPapers (15)

Published in The Review of Economic Studies, 2006, Vol.72,n°2, pp.329-355

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Related works:
Journal Article: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (1998)
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