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Financial market breakdown due to strategy constraints and information asymmetry

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  • Jie Hu

Abstract

This paper demonstrates the relevance of strategy constraints on market makers to the possibility of financial market breakdown when there is information asymmetry between market makers and investors; both the case of competitive market makers and the case of a monopolistic market marker are included. Specifically, the paper discusses three types of strategy constraints on the market makers and their implications for the equilibria. The results call attention to the need for more precise specifications of institutional environments (beyond information asymmetry and the mode of competition/monopoly) when considering the possibility of financial market breakdown.

Suggested Citation

  • Jie Hu, 1995. "Financial market breakdown due to strategy constraints and information asymmetry," FRB Atlanta Working Paper 95-18, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:95-18
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    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/1995/wp9518.pdf
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    References listed on IDEAS

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    1. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-235, April.
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    Keywords

    Financial markets; Information theory;

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