Liquidity and Optimal Market Transparency

Abstract:     
In this paper we explore some of the consequences of greater market transparency for market performance in the presence of a strategic specialist. Although numerous studies have dealt with this issue, previous work has only considered either fully transparent or fully opaque markets. Our model allows for different levels of transparency, and therefore sheds light on how transparency affects market performance. We show that an intermediate level of transparency can improve market performance relative to the more extreme cases of full transparency or no transparency at all.

Number of Pages in PDF File: 32

Keywords: Market Liquidity, Market Transparency, Strategic Specialist

JEL Classification: D82, G12, G14

working papers series