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A baseline model of price formation in a sequential market

Zachariadis, Konstantinos (2012) A baseline model of price formation in a sequential market. . (Unpublished)

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A basic question in economics is how well the market price aggregates and transmits dispersed information. We address this using the trading protocol of Glosten and Milgrom (1985) but in an environment where there are neither pure liquidity-driven traders, nor pure speculators. We prove that the ask and bid prices in the limit collapse to a single value (the limiting price) that reveals the fundamental value of the asset. Adverse selection does not impede the estimation problem in the sense that the rate of convergence to the limiting price is the same as that of a fully signal-revealing mechanism.

Item Type: Monograph (Working Paper)
Additional Information: © 2012 The author
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 16 Apr 2012 09:18
Last Modified: 27 Feb 2014 15:35

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