The quality of price formation at market openings and closings: evidence from the Nasdaq stock market

  • Central counterparties (CCPs) have increasingly become a cornerstone of financial markets infrastructure. We present a model where trades are time-critical, liquidity is limited and there is limited enforcement of trades. We show a CCP novating trades implements efficient trading behaviour. It is optimal for the CCP to face default losses to achieve the efficient level of trade. To cover these losses, the CCP optimally uses margin calls, and, as the default problem becomes more severe, also requires default funds and then imposes position limits.

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Author:Michael S. Pagano, Lin Peng, Robert A. Schwartz
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,45
Series (Serial Number):CFS working paper series (2008, 45)
Document Type:Working Paper
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2009/01/29
Tag:Call Market; Closing Price; Equity Markets; Intra-Day Volatility; Market Microstructure; Nasdaq; Opening Price; price discovery
GND Keyword:Zentraler Kontrahent
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht