Dividing the Pie

48 Pages Posted: 18 Jan 2003

See all articles by Mark D. Flood

Mark D. Flood

R. H. Smith School of Business, U. of Maryland

Kees C. G. Koedijk

Tilburg University - Department of Finance

Mathijs A. van Dijk

Erasmus University Rotterdam (EUR)

Irma W. van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE)

Date Written: 29 2002, 10

Abstract

We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency.

Keywords: financial markets, market microstructure, experimental economics, information asymmetry

JEL Classification: M, M41, G3, G10, G14, D82

Suggested Citation

Flood, Mark D. and Koedijk, Kees G. and van Dijk, Mathijs A. and van Leeuwen, Irma W., Dividing the Pie (29 2002, 10). Available at SSRN: https://ssrn.com/abstract=371044

Mark D. Flood (Contact Author)

R. H. Smith School of Business, U. of Maryland ( email )

College Park
College Park, MD 20742
United States

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Irma W. Van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands