Chapter

Classification of Market Microstructure Models

Markus K. Brunnermeier

in Asset Pricing under Asymmetric Information

Published in print January 2001 | ISBN: 9780198296980
Published online November 2003 | e-ISBN: 9780191596025 | DOI: http://dx.doi.org/10.1093/0198296983.003.0003
Classification of Market Microstructure Models

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The third chapter contrasts different market microstructure models. In the first group of models, all market participants submit whole demand schedules simultaneously. The traders either act strategically or are price takers as in the competitive Rational Expectations Equilibrium. The strategic models are closely related to share auctions or divisible goods auctions. In the second group of models some traders simultaneously submit demand/supply schedules in the first stage and build up a whole supply schedule in form of a limit order book. In the second stage a possibly informed trader chooses his optimal demand from the offered supply schedule. A comparison between uniform pricing and discriminatory pricing is also drawn. Sequential trade models à la Glosten and Milgrom (1985) form the third group of models. In these models, the order size is restricted to one unit and thus the competitive market maker quotes only a single bid and a single ask price instead of a whole supply schedule. In the fourth group of models, the informed traders move first. The classical reference for these models is Kyle (1985).

Keywords: Bayesian Nash equilibrium; demand schedules; discriminatory pricing; Glosten‐Milgrom model; Kyle‐model; limit order book; market microstructure; rational expectations equilibrium; share auctions; uniform pricing

Chapter.  15836 words.  Illustrated.

Subjects: Financial Markets

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