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Differences Of Opinion,Asymmetric Information, Short-Sales Constraints And Price Formation

Posted on:2005-01-23Degree:DoctorType:Dissertation
Country:ChinaCandidate:M B XieFull Text:PDF
GTID:1116360125958945Subject:Finance
Abstract/Summary:PDF Full Text Request
The objective of this dissertation is to study the price behavior of the institutional arrangement in the Chinese security markets by establishing a market-trading model. This dissertation intends to answer such questions as: how is the price determined and how does the private information play a role in the pricing process.This dissertation constructs an order-driven market model with short-sale constraints, in which we consider the asymmetric information and the different opinions between traders. We obtain the equilibrium outcome through game theory and obtain the information convergence velocity through Bayesian Rule. Through analyzing the equilibrium outcome and the convergence velocity, we therefore conclude that:First, the market equilibrium is the pooling equilibrium between the informed and uninformed traders. The equilibrium quote is the outcome of the trading surplus distribution between the uninformed buyers and sellers. The distribution is based on the relative risk of no-execution of both parties.Second, at the market equilibrium, there must be positive ask-bid spread, which is composed of two terms. One is named execution risk term that is to compensate the risk of no-execution in limited orders. The other is named adverse selection that is to compensate the risk of adverse selection in limit orders. The execution risk term is a decreasing function of asset decentralization index. It is an increasing function of the proportion of informed traders and increases with the decentralization of the traders' opinion. The adverse selection term is an increasing function of asset decentralization index and the proportion of informed traders, and decreases if the uninformed traders know more information.Third, the private information can be unveiled with an exponential convergence velocity. The Short-sale constraints will decrease the information convergence velocity and restrain the bad news much worse. Also the velocity will increase with the increasing proportion of informed traders. The more the traders' opinions centralize, the quicker the private information is unveiled.This dissertation takes into consideration not only the impact of information on the price formation, but also the impact of differentopinion and trading mechanism on the price behavior. Therefore, it contributes significantly to the development of pricing theory. At the same time, this dissertation investigates the trading behavior of the participants in order-driven markets and analyzes the impact of asymmetric information and different opinion on asset pricing. Thus it contributes significantly to the Chinese practitioners.In this dissertation, it is the first time to consider the long-lived feature of information and short-sale constraints in the research of order-driven markets. It is the first time to put forward the ideas that the bid-ask spread is composed of execution risk term and adverse selection term, and that the analysis about how short-sale constraints and assets decentralization index affect these two terms. Also it is the first time to present the information convergence velocity of order-driven markets and analyze how information efficiency is affected by information asymmetry, short-sale constraints, assets decentralization and opinion decentralization. Therefore, this dissertation contributes significantly to microstructure literature.
Keywords/Search Tags:Market Microstructure, Order-driven Markets, Price Behavior
PDF Full Text Request
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