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- Title
Risk Aversion, Transparency, and Market Performance.
- Authors
DE FRUTOS, M. ÁNGELES; MANZANO, CAROLINA
- Abstract
Using a model of market making with inventories based on Biais (1993), we find that investors obtain more favorable execution prices, and they hence invest more, when markets are fragmented. In our model, risk-averse dealers use less aggressive price strategies in more transparent markets (centralized) because quote dissemination alleviates uncertainty about the prices quoted by other dealers and, hence, reduces the need to compete aggressively for order flow. Further, we show that the move toward greater transparency (centralization) may have detrimental effects on liquidity and welfare.
- Subjects
RISK management in business; PORTFOLIO management (Investments); RISK aversion; MARKET makers; INVESTMENT analysis; ECONOMIES of scale; LIQUIDITY (Economics); FINANCIAL market reaction; INVESTMENT policy; SECURITIES trading; SECONDARY markets; INFORMATION asymmetry
- Publication
Journal of Finance (Wiley-Blackwell), 2002, Vol 57, Issue 2, p959
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/1540-6261.00448