Giffen Goods and Market Making

No 68, Working Papers from Barcelona School of Economics

Abstract: This paper shows that information effects per se are not responsible for the Giffen goods anomaly affecting traders' demands in multi asset noisy, rational expectations equilibrium markets. The role that information plays in traders' strategies also matters. In a market with risk averse, uninformed traders, informed agents have a dual trading motive: speculation and market making. The former entails using prices to assess the effect of error terms; the latter requires employing them to disentangle noise traders' demands within aggregate orders. In a correlated environment this complicates the signal extraction problem and may generate upward sloping demand curves. Assuming (i) that competitive, risk neutral market makers price the assets or that (ii) uninformed traders' risk tolerance coefficient grows unboundedly, removes the market making component from informed traders' demands rendering them well behaved in prices.

Keywords: Giffen goods; financial economics; Asset pricing; information; market efficiency (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2003-12
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Related works:
Journal Article: Giffen goods and market making (2005)
Working Paper: Giffen Goods and Market Making (2003)
Working Paper: Giffen goods and market making (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:68

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