Market making, prices, and quantity limits

D.Y. Dupont

    Research output: Contribution to journalArticleAcademicpeer-review

    24 Citations (Scopus)

    Abstract

    This article develops a model of spread and depth setting under asymmetric information where the equilibrium depth is proportionally more sensitive than the spread to changes in the degree of information asymmetry. The analysis uses a one-period model in which a risk-neutral, monopolistic market maker faces a price-sensitive liquidity trader and a better informed trader who is alternatively risk neutral and risk averse. The equilibrium depth can take values ranging from 0 to infinity, depending on the information asymmetry, the asset volatility, and the strength of the liquidity demand, while the spread remains positive and finite.
    Original languageEnglish
    Pages (from-to)1129-1151
    JournalReview of Financial Studies
    Volume13
    Issue number4
    DOIs
    Publication statusPublished - 2000

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