Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960562 | Journal of Financial Economics | 2008 | 22 Pages |
Abstract
Models of adverse selection risk generally assume that market makers offset expected losses to informed traders with expected gains from the uninformed. We recognize that the expected loss captures a combination of two effects: (1) the probability that some traders have private information, and (2) the likely magnitude of that information. We use a maximum-likelihood approach to separately estimate the probability and magnitude of private information events for NYSE-listed stocks from 1993 through 2003. The results shed light on the price discovery process and have implications for many areas of finance.
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Authors
Elizabeth R. Odders-White, Mark J. Ready,