A Specialist's Quoted Depth as a Strategic Choice Variable

12-96

Posted: 18 Sep 1996

See all articles by Kenneth A. Kavajecz

Kenneth A. Kavajecz

Edgewood College; Phoenix Rising Advisory

Date Written: July 1996

Abstract

There are two distinct components to a specialist's price schedule, prices and depths. This paper presents a model of a specialist's problem of choosing prices and depths jointly in order to maximize profits. Closed form solutions are provided for both constrained and unconstrained versions of the model. The contribution of this work is twofold. First, the model demonstrates the strategic importance of depths for the specialist and highlights its effect on overall liquidity. Second, the joint responses of prices and depths to various concerns of the specialist may be useful in differentiating between competing microstructure effects. Comparative static results show how depths respond to changes in: (1) the amount of asymmetric information, (2) uncertainty about the terminal value, (3) the prior probability assessments of future prices and (4) the distribution of liquidity trades.

JEL Classification: G10, G14

Suggested Citation

Kavajecz, Kenneth A., A Specialist's Quoted Depth as a Strategic Choice Variable (July 1996). 12-96, Available at SSRN: https://ssrn.com/abstract=7743

Kenneth A. Kavajecz (Contact Author)

Edgewood College ( email )

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Phoenix Rising Advisory ( email )

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