Discussion Paper No. 28
November 3, 2021
Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?
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Abstract:
We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hid- den liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illus- trate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
Keywords:
hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book;
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Discussion Paper No. 17
Sender-Receiver Games with Cooperation
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Abstract:
We consider generalized sender-receiver games in which the sender also has a decision to make, but this decision does not directly a§ect the receiver. We introduce speciÖc perfect Bayesian equilibria, in which the players agree on a joint decision after that a message has been sent (ìtalk and cooperate equilibrium,î TCE). We establish that a TCE exists provided that the receiver has a ìuniform punishment decisionî (UPD) against the sender.
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Discussion Paper No. 22
Mean Field Games with Singular Controls
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Abstract:
This paper establishes the existence of relaxed solutions to mean field games (MFGs for short) with singular controls. As a by-product, we obtain an existence of relaxed solutions results for McKean-Vlasov stochastic singular control problems. Finally, we prove approximations of solutions results for a particular class of MFGs with singular controls by solutions, respectively control rules, for MFGs with purely regular controls. Our existence and approximation results strongly hinge on the use of the Skorokhod M1 topology on the space of càdlàg functions.
Keywords:
mean field game; singular control; relaxed control; Skorokhod M1 topology;
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Discussion Paper No. 24
Sequential versus Static Screening: an Equivalence Result
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Abstract:
We show that every sequential screening model is equivalent to a standard text book static screening model. We use this result and apply well-established techniques from static screen- ing to obtain solutions for classes of sequential screening models for which standard sequen- tial screening techniques are not applicable. Moreover, we identify the counterparts of well– understood features of the static screening model in the corresponding sequential screening model such as the single-crossing condition and conditions that imply the optimality of deter- ministic schedules.
Keywords:
sequential screening; static screening; stochastic mechanisms;
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Discussion Paper No. 3
November 2, 2021
Certification and Market Transparency
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Abstract:
In markets with quality unobservable to buyers, third-party certification is often the only instrument to increase transparency. While both sellers and buyers have a demand for certification, its role differs fundamentally: sellers use it for signaling, buyers use it for inspection. Seller induced certification leads to more transparency, because it is informative – even if unused. By contrast, buyer induced certification incentivizes certifiers to limit transparency, as this raises demand for inspection. Whenever transparency is socially beneficial, seller certification is preferable. It also yields certifiers larger profits, so that regulating the mode of certification is redundant.
Keywords:
market transparency; certification; information and product quality; asymmetric information;
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Discussion Paper No. 2
A Theory of Crowdfunding
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Abstract:
Crowdfunding provides innovation in enabling entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard and private cost in- formation threatens this benefit. Crowdfunding’s after-markets enable consumers to actively implement deferred payments and thereby manage moral hazard. Popular crowdfunding platforms offer schemes that allow consumers to do so through con- ditional pledging behavior. Efficiency is sustainable only if expected returns exceed an agency cost associated with the entrepreneurial incentive problems. By reducing demand uncertainty, crowdfunding promotes welfare and complements traditional entrepreneurial financing, which focuses on controlling moral hazard.
Keywords:
crowdfunding; entrepreneurship; moral hazard; demand uncertainty;
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