Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5069543 | Finance Research Letters | 2015 | 10 Pages |
Abstract
This paper extends some classical models, built upon the representative-agent and Walrasian market-clearing mechanism, into one characterized by a market-maker trading mechanism with investors having heterogeneous beliefs regarding the likely future payoff of a risky security. We show the optimal determination of the bid and ask prices and resultant trading volume. The endogenously-determined spread and volume are increasing with the degree of the heterogeneity of investors' beliefs. We analyze the market marker's risk exposure based on his inventory, under the condition in which he is fully informed of the investors' beliefs, and under the condition in which he is not.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Bin Guo, Wei Zhang, Shu-Heng Chen, Yongjie Zhang,