Download this Paper Open PDF in Browser

How Do Designated Market Makers Create Value for Small-Caps?

57 Pages Posted: 14 Mar 2006 Last revised: 2 Aug 2011

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Ting Wang

VU University Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2011

Abstract

A poor liquidity level and a high liquidity risk significantly raise the required return for small-cap stocks. Euronext allows these firms to hire designated market makers (DMMs) who guarantee a minimum liquidity supply for a lump sum annual fee. In an event study based on 74 DMM stocks, we find that the contract improves liquidity level, reduces liquidity risk, and generates an average abnormal return of 3.5%. DMMs participate in more trades and incur a trading loss on high quoted-spread days, i.e., days when their constraint is likely to bind. Finally, DMMs reduce the size of pricing errors.

Keywords: liquidity, liquidity risk, designated market makers, small-cap, volume, volatility, price discovery

JEL Classification: G10

Suggested Citation

Menkveld, Albert J. and Wang, Ting, How Do Designated Market Makers Create Value for Small-Caps? (August 1, 2011). AFA 2008 New Orleans Meetings Paper; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=890526 or http://dx.doi.org/10.2139/ssrn.890526

Albert J. Menkveld (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Ting Wang

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081HV
Netherlands

Paper statistics

Downloads
583
Rank
26,624
Abstract Views
3,155