Liquidity Provision and Market-Making in Different Uncertainty Regimes: Evidence from the COVID-19 Market Crash

40 Pages Posted: 30 Mar 2021

See all articles by Amine Raboun

Amine Raboun

Euronext Paris; Université Paris Dauphine

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Charles‐Albert Lehalle

Capital Fund Management

Date Written: March 29, 2021

Abstract

Kyle (1985) builds a pioneering and influential model, in which an insider observing private information submits an optimal order given the market-maker’s pricing rule, which is assumed a linear function of the aggregated order flow. We propose an extension to Kyle's model where different types of uncertainty regimes exist and where the market maker estimates market uncertainty and uses it to set her price. The model implies that the elasticity of prices to liquidity demand will increase in high uncertainty regimes. We test the outcome of the model empirically by studying the price formation process during the COVID-19 pandemic crash. A period of agitation with important announcements having a major impact on financial markets, such as the state lockdown and the Fed's fiscal response. We find that indeed the elasticity of prices to liquidity demand during the COVID-19 period has increased four times.

Keywords: Price Formation Process, Liquidity, COVID-19 Pandemic

Suggested Citation

Raboun, Amine and Briere, Marie and Lehalle, Charles‐Albert, Liquidity Provision and Market-Making in Different Uncertainty Regimes: Evidence from the COVID-19 Market Crash (March 29, 2021). Available at SSRN: https://ssrn.com/abstract=3815169 or http://dx.doi.org/10.2139/ssrn.3815169

Amine Raboun (Contact Author)

Euronext Paris ( email )

14 Place des Reflets
Courbevoie, 92400
France
0170482400 (Phone)

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

Université Libre de Bruxelles ( email )

Brussels
Belgium

Charles‐Albert Lehalle

Capital Fund Management

23 rue de l'Université
Paris, 75007
France

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