medium · Market Microstructure
A dealer in a competitive market expects that 20% of incoming orders are from informed traders (α = 0.20). These informed traders are estimated to have an informational advantage μ = $0.50 per share.
If order processing and inventory costs are negligible, what is the competitive bid-ask spread according to the adverse selection model?
- $0.10
- $0.20
- $0.50
- $0.04
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