Risk Aversion, Transparency, and Market Performance

Posted: 3 Dec 2003

See all articles by Maria Angeles de Frutos

Maria Angeles de Frutos

Universidad Carlos III de Madrid - Department of Economics

Carolina Manzano Tovar

Rovira i Virgili University - Department of Economics

Abstract

Using a model of market making with inventories based on Biais (1993), we find that investors obtain more favorable execution prices, and they hence invest more, when markets are fragmented. In our model, risk-averse dealers use less aggressive price strategies in more transparent markets (centralized) because quote dissemination alleviates uncertainty about the prices quoted by other dealers and, hence, reduces the need to compete aggressively for order flow. Further, we show that the move toward greater transparency (centralization) may have detrimental effects on liquidity and welfare.

Suggested Citation

de Frutos, Maria Angeles and Manzano Tovar, Carolina, Risk Aversion, Transparency, and Market Performance. Journal of Finance, Vol. 57, pp. 959-984, 2002, Available at SSRN: https://ssrn.com/abstract=309187

Maria Angeles De Frutos (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Carolina Manzano Tovar

Rovira i Virgili University - Department of Economics ( email )

Tarragona
Spain

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