Industrial
and
EIN 6918: Graduate Seminar
Spring 2008
March 6, 2008
3PM, MAEB 211
Information Asymmetry
in Direction and Volatility: Price Process and Transaction Level Analysis
Joon-Hui
Yoon
Department of Industrial and Systems Engineering
University of Florida
Abstract
Adverse selection problem by informed trader in equity and option markets has been important issue especially in option market. Since Black-Scholes assumption of complete market is violated in this situation, the corresponding option price is not redundant, implying private information is dispersed not only from equity to option but also from option to equity price. I present a market-microstructural equity and option pricing strategy by market maker, based on Easley and O'Hara's Bayesian Nash equilibrium pricing model, which successfully sets a bid-ask spread of equity and option price to make the informed trader refrain from taking advantage, as well as encouraging uninformed liquidity trader to trade.