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Belief-free Price Formation

Hörner, Johannes and Lovo, Stefano (2017) Belief-free Price Formation. TSE Working Paper, n. 17-790, Toulouse

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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.

Item Type: Monograph (Working Paper)
Language: English
Date: March 2017
Place of Publication: Toulouse
Uncontrolled Keywords: Financial Market Microstructure, Belief-free Equilibria, Informed Market Makers, Price Volatility
JEL Classification: C72 - Noncooperative Games
C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
G1 - General Financial Markets
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 29 Mar 2017 09:34
Last Modified: 07 Mar 2018 13:24
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