Hörner, Johannes, Lovo, Stefano and Tomala, Tristan (2018) Belief-free Price Formation. Journal of Financial Economics, 127 (2). pp. 342-365.

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Identification Number : 10.1016/j.jfineco.2017.11.004


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: Article
Language: English
Date: February 2018
Refereed: Yes
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)
Site: UT1
Date Deposited: 03 May 2018 13:16
Last Modified: 02 Apr 2021 15:57
OAI Identifier: oai:tse-fr.eu:31599
URI: https://publications.ut-capitole.fr/id/eprint/25622

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