Risk Aversion, Transparency, and Market Performance
Posted: 3 Dec 2003
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: 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
Do you have a job opening that you would like to promote on SSRN?
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.