with J. Horner and T. Tomala

We analyze security price formation in a dynamic setting in which long-lived dealers repeatedly compete for trading with short-lived retail traders. We characterize equilibria in which dealers’ dynamic pricing strategies are optimal no matter the private information each dealer may possess. Thus, our model’s predictions are robust to different specifications of dealers’ information structure. These equilibria reconcile in a single and parsimonious model price dynamics that are reminiscent of well-known stylized facts: excess price volatility, price/trading-flow correlation, stochastic volatility and inventory-related trading.

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