Bid-Ask Price Competition with Asymmetric Information between Market-Makers - Archive ouverte HAL Access content directly
Journal Articles The Review of Economic Studies Year : 2006

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

(1) ,
1
Ricardo Calcagno
  • Function : Author

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.
Not file

Dates and versions

hal-00460018 , version 1 (26-02-2010)

Identifiers

  • HAL Id : hal-00460018 , version 1

Cite

Stefano Lovo, Ricardo Calcagno. Bid-Ask Price Competition with Asymmetric Information between Market-Makers. The Review of Economic Studies, 2006, Vol.72,n°2, pp.329-355. ⟨hal-00460018⟩

Collections

HEC CNRS
25 View
0 Download

Share

Gmail Facebook Twitter LinkedIn More