Strategic Liquidity Supply and Security Design ∗

  title={Strategic Liquidity Supply and Security Design ∗},
  author={Bruno Biais and Thomas Mariotti},
We study how securities and trading mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity. Following DeMarzo and Duffie (1999), we consider asset owners who seek to obtain liquidity by selling their claims on future cash-flows, on which they have private information. We allow for strategic liquidity supply and take a mechanism design approach to characterize both the optimal security and the optimal trading mechanism. For a given arbitrary security… CONTINUE READING
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