Essays in the economics of market making.
Item
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Title
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Essays in the economics of market making.
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Identifier
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AAI9315487
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identifier
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9315487
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Creator
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Liu, Hengzhong.
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Contributor
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Adviser: Ronald W. Anderson
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Date
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1993
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance | Economics, General | Business Administration, General
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Abstract
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This dissertation is composed of three self-contained essays. It is mainly concerned with the economics of market making in the specialist--organized stock exchange.;Under different configurations of the specialist's market structure and his risk attitude, the first essay studies the competitive and informational properties of the specialist's pricing. It demonstrates the following. The greater his monopolistic power and/or the more averse his risk attitude, the higher sale price and the lower purchase price the specialist would quote, and hence the less likely his special information would be revealed through his pricing. The specialist could possibly make abnormal profits in providing transaction service by using price as a wand to manipulate the stock exchange. Furthermore, the Grossman-Stiglitz (1980) impossibility rises only when traders' expectations become homogenized and traders share the same belief with the specialist.;By integrating asymmetric-information and inventory-control theoretic approaches, the second essay derives a general transaction price functional that synthesizes diverse effects of trading volumes on transaction prices. This price functional for a monopoly specialist is found to be the average of his estimate about the trader's reservation price of demanding for transaction service and his own reservation price of providing transaction service. Under assumptions that the specialist is risk neutral and his inventory policy is linear, this price functional is estimated for 10 most heavily traded stocks in TORQ database. In spite of the fact that some estimates appear inconsistent across stocks, the overall estimation gives the general transaction price functional a very encouraging empirical support.;Most existing studies on price-volume relation are based on the specialist's supply function of transaction service, addressing the positive correlation between changes in transaction prices and signed volumes. In contrast, chapter three introduces and estimates a systematic market model for both bid and ask submarkets of stock exchange from both demand and supply sides of the specialist's transaction service. The model is derived by integrating rational expectations approach and asymmetric information approach. It is estimated by the so-called disequilibrium methods. The empirical results reliably support the asymmetric information hypothesis, the market disequilibrium hypothesis and infinite elasticity hypothesis. They are also consistent, to some extent, with the mean-variance investment theory.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
