Template-Type: ReDIF-Article 1.0

Author-Name: Kira Muratov-Szabó
Author-Workplace-Name: Corvinus University of Budapest
Author-Email: muratov.kira@gmail.com

Author-Name: Kata Váradi
Author-Workplace-Name: Corvinus University of Budapest
Author-Email: kata.varadi@uni-corvinus.hu
Author-Person: pvr19

Title: The Impact of Adverse Selection on Stock Exchange Specialists’ Price Quotation Strategy

Abstract: This paper focuses on the activity of the specialists – one of the key participants in
stock exchange trading. We attempt to model the price quotations of specialists
in a modelling framework where some of the parties involved in the transactions
may be informed, while others are uninformed “liquidity traders”. It is in this
adverse selection modelling framework that, relying on the technique of Monte
Carlo simulation, we seek an answer to the following research questions: how
does adverse selection impact the price quotation of specialists; to what extent
are prices and logreturns influenced by uncertainty; to what degree of accuracy
can specialists determine the proportion of informed traders and liquidity traders
from trading volumes? Our model confirmed that as soon as uncertainty subsided
in the simulated market, the number of transactions, wealth and the stock portfolio
started to grow, while price fluctuations began to decline and the standard deviation
and the distribution of logreturns edged closer and closer to a normal distribution,
which points to improving market efficiency.

Classification-JEL: G12, G14, G17
Keywords: specialist, price quotation, adverse selection
Pages: 88-124
Volume: 18
Issue: 1
Year: 2019
File-URL: http://english.hitelintezetiszemle.hu/letoltes/fer-18-1-st4-muratov-szabo-varadi.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:18:y:2019:i:1:p:88-124