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

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.
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Submitted on : Friday, February 26, 2010 - 9:22:21 AM
Last modification on : Saturday, June 25, 2022 - 10:50:35 AM


  • HAL Id : hal-00460018, version 1




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⟩



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