Hostname: page-component-586b7cd67f-t8hqh Total loading time: 0 Render date: 2024-11-20T08:33:32.914Z Has data issue: false hasContentIssue false
  • English
  • Français

A Formal Dynamic Model of Market Making

Published online by Cambridge University Press:  06 April 2009

James Bradfield
Get access Rights & Permissions [Opens in a new window]

Extract

In a recent issue of this journal Barnea [1] presented an empirical study of the impact of a specialist (market-maker) on the variability of the price of a stock. He concludes with others that “the chief cost of dealing with a market maker is the difference between the theoretical but unobservable equilibrium price and the transaction price, rather than the bid-ask spread.” This paper presents a rigorous dynamic model in which the specialist, who is uncertain about the future arrival of tenders, determines transaction prices periodically over the trading day. The structure of the model permits a direct comparison of the specialist's prices to the “equilibrium price,” to be defined below, and also to what prices would be in the absence of a specialist.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 2 , June 1979 , pp. 275 - 291
Copyright
Copyright © School of Business Administration, University of Washington 1979

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Barnea, A. “Performance Evaluation of New York Stock Exchange Specialists.” Journal of Financial and Quantitative Analysis (09 1974), pp. 511–35.Google Scholar
[2]Barnea, A., and Logue, D. E.. “The Effect of Risk on the Market Maker's Spread.” Financial Analysts Journal, Vol. 31, (11 1975), pp. 45–9.CrossRefGoogle Scholar
[3]Baumol, W. J.The Stock Market and Economic Efficiency. The Millan Lectures, No. 6. New York: Fordham University Press (1965).Google Scholar
[4]Demsetz, H. “The Cost of Transacting.” Quarterly Journal of Economics, Vol. 82, No. 1 (02 1968), pp. 33–53.CrossRefGoogle Scholar
[5]Leffler, G. L., and Farwell, L. C.. The Stock Market. New York: Ronald Press Co. (1963).Google Scholar
[6]Logue, D. E. “Market-Making and the Assessment of Market Efficiency.” Journal of Finance, Vol. XXX, No. 1 (03 1975), pp. 115–123.Google Scholar
[7]Mandelbrot, B. “When Can Price be Arbitraged Efficiently?… ” Review of Economics and Statistics (08 1971), pp. 225–36.CrossRefGoogle Scholar
[8]Securities and Exchange Commission, Report of the Special Study of the Securities Markets of the Securities and Exchange Commission, Part 2, 89th Congress, 1st Session, House Document No. 95, Part 2. Washington, D.C.: U. S. Government Printing Office (1963), pp. 57–171.Google Scholar
[9]Smidt, S. “Which Road to an Efficient Market?…” Financial Analysts Journal (09/10 1971), pp. 18 et. seq.CrossRefGoogle Scholar
[10]Stigler, C. J. “Public Regulation of the Securities Markets.” Journal of Business, Vol. 38, No. 2 (04 1964), pp. 117–33.CrossRefGoogle Scholar
[11]Tinic, S. M., and West, R. R.. The Economics of the Stock Market. New York: Praeger Publishers (1971).Google Scholar
[12]Tinic, S. M., and West, R. R.. “Marketability of Common Stocks in Canada and the USA: A Comparison of Agent versus Dealer Dominated Markets.” Journal of Finance, Vol. 29, No. 3 (06 1974), pp. 720–46.CrossRefGoogle Scholar
[13]Wall Street Journal (Friday, 07 30, 1976), p. 2.Google Scholar