Uncertain Market Making

48 Pages Posted: 1 Oct 2015 Last revised: 3 May 2017

Date Written: May 2, 2017

Abstract

This paper argues that market makers' presence is uncertain over any short time interval, as their operations are subject to constraints of, e.g., capital, technology, and attention. Such uncertain market making implies a random pricing equilibrium with new implications on market quality. A structural model captures the predicted price dispersion in the U.S. equity trading. In 2014, the estimated short-run dispersion is around 10 times of the long-run price impact, compared to only 2 times in the early 2000s. The theory and the structural model of uncertain market making contribute to the understanding of price dynamics.

Keywords: market making, price dispersion, liquidity, price efficiency

JEL Classification: G10, D40

Suggested Citation

Yueshen, Bart Zhou, Uncertain Market Making (May 2, 2017). Finance Down Under 2016 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2667837 or http://dx.doi.org/10.2139/ssrn.2667837

Bart Zhou Yueshen (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

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