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Quotes, Trades and the Cost of Capital

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Abstract

We study how market makers set their quotes in relation to trading, liquidity, and expected returns. In our model, market makers in neglected, difficult-to-understand stocks monitor the market more often, thus increasing their quote-to-trade (QT) ratio. They also monitor more often when their clients are more precisely informed, which reduces mispricing and lowers expected returns. Consistent with our model, large QT ratios are empirically associated with low expected returns, a result driven by quotes, not by trades. Moreover, more market makers are associated with smaller QT ratios, but have no effect on the cost of capital.
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hal-01941510 , version 1 (01-12-2018)

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  • HAL Id : hal-01941510 , version 1

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Ioanid Rosu, Elvira Sojli, Wing Wah Tham. Quotes, Trades and the Cost of Capital. 2017. ⟨hal-01941510⟩
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