hard · Market Microstructure adverse-selection
A competitive market maker operating under the Glosten-Milgrom framework estimates that the probability of an arriving order being informed is α = 0.25. The fundamental value of the asset is either V_H =105orV_L = 95 with equal prior probability.
What is the break-even quoted bid-ask spread the dealer must set to cover adverse selection costs?
- $5.00
- $1.25
- $2.00
- $2.50
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