Why trade with Goldman?

نویسنده

  • James McLoughlin
چکیده

Using a model of repeated trade between a long-lived, informed, price-discriminating market maker and risk averse traders with endogenous hedging demands, I first show that traders are weakly better off trading with an informed dealer, as they may learn something about an asset’s value in the process of transacting. Second, while longterm incentives can induce an informed market maker to honestly reveal information and increase risk-sharing, they also enable the market maker to hide her information and extract more rents, reducing price informativeness. This less desirable outcome dominates with respect to both the parameter space and a selection criterion. Finally, measures of market quality, such as the transient component of price volatility (illiquidity), may not accurately reflect welfare. ∗[email protected], Ph.D. candidate, Haas School of Business, University of California, Berkeley. I thank Christine Parlour, Terry Hendershott, Willie Fuchs, Brett Green, Marcus Opp, Bradyn Breon-Drish, Barney Hartman-Glaser, and Sara Holland for their comments on earlier drafts. All errors are my own.

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تاریخ انتشار 2012