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- Title
Liquidity Supply by a Risk-Averse Market Maker.
- Authors
BASOV, SUREN; YIN, XIANGKANG
- Abstract
Market makers bear enormous uncertainty of the values of their portfolios and their attitude towards risk should not be completely ignored. In this article, we analyse a quote-driven market of a risky financial asset, where a risk-averse market maker supplies liquidity to traders. We characterise the equilibrium of the market for trading based on liquidity demand/diverse opinions on the value of the risky asset or based on information asymmetry. We find that risk aversion of the market maker is likely to increase the non-participation range of traders and the bid-ask spread.
- Subjects
MARKET orders; MARKET makers; STOCKBROKERS; RISK aversion; LIQUIDITY (Economics)
- Publication
Economic Record, 2011, Vol 87, Issue 279, p617
- ISSN
0013-0249
- Publication type
Article
- DOI
10.1111/j.1475-4932.2011.00761.x