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A comparison of stock market mechanisms

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  • Giovanni Cespa

Abstract

This paper studies the relationship between the amount of public information that stock market prices incorporate and the equilibrium behavior of market participants. The analysis is framed in a static, NREE setup where traders exchange vectors of assets accessing multidimensional information under two alternative market structures. In the first (the unrestricted system), both informed and uninformed speculators can condition their demands for each traded asset on all equilibrium prices; in the second (the restricted system), they are restricted to condition their demand on the price of the asset they want to trade. I show that informed traders’ incentives to exploit multidimensional private information depend on the number of prices they can condition upon when submitting their demand schedules, and on the specific price formation process one considers. Building on this insight, I then give conditions under which the restricted system is more efficient than the unrestricted system.

Suggested Citation

  • Giovanni Cespa, 2001. "A comparison of stock market mechanisms," Economics Working Papers 545, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2003.
    • Handle: RePEc:upf:upfgen:545
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    References listed on IDEAS

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    Cited by:

    1. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    2. Eric Budish & Peter Cramton & Albert S. Kyle & Jeongmin Lee & David Malec, 2022. "Flow Trading," ECONtribute Discussion Papers Series 146, University of Bonn and University of Cologne, Germany.
      • Eric Budish & Peter Cramton & Albert S. Kyle & Jeongmin Lee & David Malec, 2023. "Flow Trading," NBER Working Papers 31098, National Bureau of Economic Research, Inc.
    3. Giovanni Cespa, 2005. "Giffen goods and market making," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 983-997, June.
    4. Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002. "Inducing liquidity in thin financial markets through combined-value trading mechanisms," European Economic Review, Elsevier, vol. 46(9), pages 1671-1695, October.
    5. Schellhorn, Henry, 2011. "A trading mechanism contingent on several indices," European Journal of Operational Research, Elsevier, vol. 213(3), pages 551-558, September.
    6. Marzena Rostek & Ji Hee Yoon, 2021. "Exchange Design and Efficiency," Econometrica, Econometric Society, vol. 89(6), pages 2887-2928, November.
    7. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.
    8. Giovanni Cespa & Thierry Focault, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CSEF Working Papers 284, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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    More about this item

    Keywords

    Financial economics; asset pricing; information and market efficiency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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