Suppose that dealer inventory costs were the sole source of the dealer spread. Further suppose that a
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Suppose that dealer inventory costs were the sole source of the dealer spread. Further suppose that a transaction was executed at the bid. Would subsequent bid and offer quotes tend to be higher or lower? Why? Now, suppose that a transaction was executed at the offer. Would subsequent bid and offer quotes tend to be higher or lower? Why? In either scenario, would transaction prices tend to exhibit positive, negative, or zero autocorrelation? Why?
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In the event of a transaction at the bid the riskaverse dealer would adjust quotes to promote inven...View the full answer
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