An Analysis of Market Makers' Behavior on NASDAQ Europe
25 Pages Posted: 3 Feb 2003
Date Written: January 8, 2003
The paper empirically investigates market makers' behavior on Nasdaq Europe. The impact of market makers' competition and some other microstructure effects on spreads are analyzed. We perform a decomposition of the spread into its components in both Huang & Stoll (1997) and Lin, Sanger & booth (1995) settings. The main finding is the small adverse selection component on this rather thin market, together with a high serial correlation in the order flow. Although the spread decomposition does not succeed in identifying inventory costs, we show that market makers manage their inventories effectively. However, reversion to a desired inventory level appears to be slow, compared to what has been documented on more active markets.
Keywords: Market Microstructure, Spread Components, Stock Inventory Management, Nasdaq Europe
JEL Classification: G14, G10
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