Market making with asymmetric information and inventory risk

• 成果类型: Article
• 署名作者: Liu, Hong; Wang, Yajun
• 署名单位: Washington University (WUSTL); University System of Maryland; University of Maryland College Park
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2016.01.005
• 发表日期: 2016
• 页码: 73-109
• 关键词: Market making; illiquidity; Bid-ask spread; asymmetric information; imperfect competition

摘要

Market makers in some financial markets often make offsetting trades and have significant market power. We develop a market making model that captures these market features as well as other important characteristics such as information asymmetry and inventory risk. In contrast to the existing literature, a market maker in our model can optimally shift some trades with some investors to other investors by adjusting bid or ask. As a result, we find that consistent with empirical evidence, expected bid-ask spreads may decrease with information asymmetry and bid-ask spreads can be positively correlated with trading volume. (C) 2016 Elsevier Inc. All rights reserved.