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Bid Ask Price Competition with Asymmetric Information Between Market Makers

Author

Listed:
  • Stefano Lovo

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Riccardo Calcagno

    (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain)

Abstract

We consider the effect of asymmetric information on price formation process in a financial market where private information is held by a market maker. A Bayesian game is proposed in which there is price competition between two market makers with two different information partitions. At each stage players set bid and ask prices simultaneously and then trade occurs between market maker who proposes the most profitable price and liquidity traders. We characterize a set of partially revealing equilibria where the informed market maker's prices do not convey his private information. Informed player's equilibrium payoffsare proportional to prior beliefs of the market.

Suggested Citation

  • Stefano Lovo & Riccardo Calcagno, 1998. "Bid Ask Price Competition with Asymmetric Information Between Market Makers," Working Papers hal-00600245, HAL.
    • Handle: RePEc:hal:wpaper:hal-00600245
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    Cited by:

    1. Bongaerts, Dion & Achter, Mark Van, 2021. "Competition among liquidity providers with access to high-frequency trading technology," Journal of Financial Economics, Elsevier, vol. 140(1), pages 220-249.
    2. Chang, Sanders S. & Wang, F. Albert, 2015. "Adverse selection and the presence of informed trading," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 19-33.
    3. Hadiza Moussa Saley & Bernard De Meyer, 2003. "On the strategic origin of Brownian motion in finance," International Journal of Game Theory, Springer;Game Theory Society, vol. 31(2), pages 285-319.
    4. Arzé Karam, 2017. "The effects of intraday news flow on market liquidity, price volatility and trading activity," Economics Bulletin, AccessEcon, vol. 37(4), pages 2354-2363.
    5. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.
    6. Schweinzer, Paul, 2010. "Sequential bargaining with common values," Journal of Mathematical Economics, Elsevier, vol. 46(1), pages 109-121, January.
    7. Zhang, Wei & Huang, Ke & Feng, Xu & Zhang, Yongjie, 2017. "Market maker competition and price efficiency: Evidence from China," Economic Modelling, Elsevier, vol. 66(C), pages 121-131.
    8. Iraklis Kollias & John Leventides & Vassilios G. Papavassiliou, 2024. "On the solution of games with arbitrary payoffs: An application to an over‐the‐counter financial market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1877-1895, April.
    9. Calcagno, R. & Lovo, S.M., 2002. "Market Efficiency and Price Formation When Dealers are Asymmetrically Informed," Discussion Paper 2002-42, Tilburg University, Center for Economic Research.
    10. Arzé Karam, 2022. "Dealers' incentives to reveal their names," The Financial Review, Eastern Finance Association, vol. 57(1), pages 27-44, February.
    11. Schweinzer, Paul, 2006. "Sequential bargaining with pure common values," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 137, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    12. Shino Takayama, 2013. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 492, School of Economics, University of Queensland, Australia.
    13. Hörner, Johannes & Lovo, Stefano & Tomala, Tristan, 2018. "Belief-free price formation," Journal of Financial Economics, Elsevier, vol. 127(2), pages 342-365.
    14. Takayama, Shino, 2021. "Price manipulation, dynamic informed trading, and the uniqueness of equilibrium in sequential trading," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    15. Shino Takayama, 2018. "Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation," Discussion Papers Series 603, School of Economics, University of Queensland, Australia.
    16. Calcagno, R. & Lovo, S.M., 2002. "Market Efficiency and Price Formation When Dealers are Asymmetrically Informed," Other publications TiSEM 30951a58-24f2-43f0-9e35-e, Tilburg University, School of Economics and Management.
    17. Allen, Linda & Gottesman, Aron A. & Peng, Lin, 2012. "The impact of joint participation on liquidity in equity and syndicated bank loan markets," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 50-78.
    18. Attilio Gardini & Giuseppe Cavaliere & Michele Costa, 1999. "A new approach to stock price modelling and the efficiency of the Italian stock exchange," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 8(1), pages 25-47, April.
    19. LOVO, Stefano M. & CALCAGNO, R., 2001. "Market efficiency and Price Formation when Dealers are Asymmetrically Informed," HEC Research Papers Series 737, HEC Paris.

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