Business, 26.07.2019 00:20 devnnn44

Consider our “simple model of bid-ask spreads”. suppose that a dealer trades against an order which might come from an informed trader or a liquidity trader. the security’s true value is either $60 or $50. the true value is $60 with 70% probability and $50 with 30% probability. the order is from an informed trader with 20% probability and from a liquidity trader with 80% probability. an informed trader observes the true value of $60 or $50 perfectly and places a buy order if the value is high or a sell order if the value is low. a liquidity traders buys or sells with equal probabilities. what is the expected value of this security?

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Consider our “simple model of bid-ask spreads”. suppose that a dealer trades against an order which...