easy · Market Microstructure adverse-selection
According to the Glosten-Milgrom framework, if the probability that a trader is informed (α) is zero, what happens to the adverse selection component of the spread?
- It doubles to account for increased inventory risk.
- It remains at a fixed minimum level defined by volatility.
- It shifts toward the bid side to encourage liquidity.
- It collapses to zero.
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