Belief-free price formation / by Johannes Hörner, Stefano Lovo, Tristan Tomala
Belief-free price formation / by Johannes Hörner, Stefano Lovo, Tristan Tomala
Johannes Hörner, Stefano Lovo, Tristan Tomala
- Amsterdam Elsevier February 2018
- Pages 342-365
- Journal of Financial Economics 127 (2) 0304-405X .
Abstract
We analyze security price formation in a dynamic setting in which long-lived dealers repeatedly compete for the opportunity to trade with short-lived retail traders. We characterize equilibria in which dealers’ pricing strategies are optimal irrespective of the private information that each dealer may possess. Thus, our model’s predictions are robust to different specifications of the dealers’ information structure. These equilibria reconcile, in a unified and parsimonious framework, price dynamics that are reminiscent of well-known stylized facts: excess price volatility, price to trading flow correlation, stochastic volatility and inventory-related trading.
0304-405X
Abstract
We analyze security price formation in a dynamic setting in which long-lived dealers repeatedly compete for the opportunity to trade with short-lived retail traders. We characterize equilibria in which dealers’ pricing strategies are optimal irrespective of the private information that each dealer may possess. Thus, our model’s predictions are robust to different specifications of the dealers’ information structure. These equilibria reconcile, in a unified and parsimonious framework, price dynamics that are reminiscent of well-known stylized facts: excess price volatility, price to trading flow correlation, stochastic volatility and inventory-related trading.
0304-405X