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Discretionary liquidity trading, information production and market efficiency

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  • Liu, Xia
  • Liu, Shancun
  • Qi, Zhen
  • Wen, Chunhui

Abstract

We analyze the professionals’ strategies of information production and the consequent market efficiency in the presence of discretionary liquidity trading. A unique equilibrium exists where only parts of discretionary liquidity traders can satisfy their liquidity needs. Instead of competition effect, strategic complementary effect occurs with the production of information by professionals. In particular, with discretionary liquidity trading, increases in the compensation of discretionary liquidity traders and/or the number of professionals promote information production and enhance market liquidity and information efficiency, although price volatility is amplified. This result suggests that regulators should open more access to information production for better market efficiency.

Suggested Citation

  • Liu, Xia & Liu, Shancun & Qi, Zhen & Wen, Chunhui, 2020. "Discretionary liquidity trading, information production and market efficiency," Finance Research Letters, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:finlet:v:35:y:2020:i:c:s1544612318300229
    DOI: 10.1016/j.frl.2019.09.014
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    More about this item

    Keywords

    Information production; Complimentary effect; Market liquidity; Information Efficiency;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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