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About this paper
Matteo Onger, Luigi Foscari
The authors model market makers posting bids and asks for an asset with uncertain value. An informed trader buys or sells according to whether realized value is above or below the midpoint of the best quotes, allowing either quote to shift trade direction. They prove a pure-strategy Nash equilibrium exists and show spreads widen linearly with value volatility within location-scale families. This theoretical result does not establish the cause of observed widening.
Summary by alphaXiv.
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