Bid-Ask Price Competition between Market Makers with Asymmetric Information

R. Calcagno, S Lovo

Research output: Contribution to JournalArticleAcademic

Abstract

This paper studies the effect of asymmetric information on the price formation process in a quotedriven 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. © 2006 The Review of Economic Studies Limited.
Original languageEnglish
Pages (from-to)329-355
JournalReview of Economic Studies
Volume73
DOIs
Publication statusPublished - 2006

Fingerprint

Dive into the research topics of 'Bid-Ask Price Competition between Market Makers with Asymmetric Information'. Together they form a unique fingerprint.

Cite this