Abstract
We analyze security price formation in a dynamic setting in which long-lived dealers repeatedly compete for trading with potentially informed retail traders. For a class of market microstructure models, we characterize equilibria in which dealers’ dynamic pricing strategies are optimal no matter the private information each dealer may possess. In a generalized version of the Glosten and Milgrom model, these equilibria deliver price dynamics reminiscent of well-known stylized facts: price/trading-flow correlation, volatility clustering, price bubble and inventory/inter-dealer trading correlation.
Keywords
Financial Market Microstructure; Belief-free Equilibria; Informed Market Makers; Price Volatility;
JEL codes
- C72: Noncooperative Games
- C73: Stochastic and Dynamic Games • Evolutionary Games • Repeated Games
- G1: General Financial Markets
- G12: Asset Pricing • Trading Volume • Bond Interest Rates
Replaced by
Johannes Hörner, Stefano Lovo, and Tristan Tomala, “Belief-free Price Formation”, Journal of Financial Economics, vol. 127, n. 2, February 2018, pp. 342–365.
Reference
Johannes Hörner, and Stefano Lovo, “Belief-free Price Formation”, TSE Working Paper, n. 17-790, March 2017.
See also
Published in
TSE Working Paper, n. 17-790, March 2017