Asymmetric Information, Endogenous Illiquidity, and Asset Pricing With Imperfect Competition
Speaker
Abstract
| We propose a novel framework to study how asymmetric information, imperfect competition among market makers, and risk aversion affect equilibrium illiquidity and asset pricing. In contrast to the standard literature where market makers compete through prices, market makers in our framework compete through quantities to buy at the bid and to sell at the ask. All the main results are obtained in closed-form. This model can help explain some of the puzzling empirical findings, such as (1) bid-ask spread can be lower with asymmetric information; (2) bid-ask spread can be positively correlated with trading volume; and (3) trading volume may increase with information asymmetry. In addition, we find that information asymmetry may reduce the welfare loss due to market power and may increase the equilibrium number of market makers. |
| The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute. |
| www.eur.nl/financegroup |
| Contact information: |
| Viorel Roscovan |
