Belief-free price formation / by Johannes Hörner, Stefano Lovo, Tristan Tomala Johannes Hörner, Stefano Lovo, Tristan Tomala
Material type:
TextSeries: Journal of Financial Economics ; 127 (2)Publication details: Amsterdam Elsevier February 2018Description: Pages 342-365ISSN: - 0304-405X
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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.
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