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Equilibrium Bid-Ask Spreads in Markets with Multiple Assets

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  • Kathleen Hagerty

Abstract

The paper models the specialist system as a monopolistically competitive market. The demand for the asset is found by solving the investor's portfolio problem with transactions costs. These demand equations are used as inputs in the specialist's price-setting problem. It is shown that equilibrium prices and hence equilibrium portfolio holdings depend upon the characteristics of the assets and the investors and the number of assets being traded. Conditions are given under which the bid and ask prices will converge to the competitive level as the number of assets increases. Predictive differences between a monopolistically competitive market and a market where specialists collude are also discussed.

Suggested Citation

  • Kathleen Hagerty, 1991. "Equilibrium Bid-Ask Spreads in Markets with Multiple Assets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 237-257.
    • Handle: RePEc:oup:restud:v:58:y:1991:i:2:p:237-257.
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    File URL: http://hdl.handle.net/10.2307/2297966
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    Citations

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    Cited by:

    1. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, vol. 1(1), pages 89-119, April.
    2. Suvanto, Antti, . "Foreign Exchange Dealing. Essays on the Microstructure of the Foreign Exchange Market," ETLA A, The Research Institute of the Finnish Economy, number 19, June.
    3. Lamoureux, Christopher G. & Schnitzlein, Charles R., 2004. "Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition," Journal of Financial Markets, Elsevier, vol. 7(2), pages 117-143, February.
    4. Suvanto, Antti, 1992. "Pricing decisions and the position constraint in foreign exchange dealing," Bank of Finland Research Discussion Papers 27/1992, Bank of Finland.
    5. Kariyawasam Galoluwage Madurika Nanayakkara & Sisira Colombage, 2021. "Does compliance with Green Bond Principles bring any benefit to make G20’s ‘Green economy plan’ a reality?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4257-4285, September.
    6. Masahiro Watanabe, 2003. "A Model of Stochastic Liquidity," Yale School of Management Working Papers ysm385, Yale School of Management.
    7. Masahiro Watanabe, 2003. "A Model of Stochastic Liquidity," Yale School of Management Working Papers ysm385, Yale School of Management.
    8. Moulton, Pamela C. & Wei, Li, 2009. "A tale of two time zones: The impact of substitutes on cross-listed stock liquidity," Journal of Financial Markets, Elsevier, vol. 12(4), pages 570-591, November.
    9. Bart Frijns & Ivan Indriawan & Alireza Tourani‐Rad, 2021. "Quote dynamics of cross‐listed stocks," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 497-522, June.
    10. Hatch, Brian C. & Johnson, Shane A., 2002. "The impact of specialist firm acquisitions on market quality," Journal of Financial Economics, Elsevier, vol. 66(1), pages 139-167, October.

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