Dividing the Pie

48 Pages Posted: 18 Jan 2003

See all articles by Mark D. Flood

Mark D. Flood

R. H. Smith School of Business, U. of Maryland

Kees C. G. Koedijk

Tilburg University - Department of Finance

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Irma W. van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE)

Date Written: 29 2002, 10

Abstract

We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency.

Keywords: financial markets, market microstructure, experimental economics, information asymmetry

JEL Classification: M, M41, G3, G10, G14, D82

Suggested Citation

Flood, Mark D. and Koedijk, Kees G. and Van Dijk, Mathijs A. and van Leeuwen, Irma W., Dividing the Pie (29 2002, 10). ERIM Report Series Reference No. ERS-2002-101-F&A. Available at SSRN: https://ssrn.com/abstract=371044

Mark D. Flood (Contact Author)

R. H. Smith School of Business, U. of Maryland ( email )

College Park
College Park, MD 20742
United States

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Irma W. Van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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