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Sebastien Pouget

is Professor of Finance at IAE Toulouse and member of the Toulouse School of Economics (Université Toulouse 1 Capitole). In 2010-2011, he was a visiting Professor of Economics at Princeton University where he taught asset management and behavioral finance. Prof. Pouget’s research studies financial markets with a multidisciplinary approach combining insights and methods from Economics, Psychology and History. He is particularly interested in the experimental methodology. His research has been published in international academic journals such as the Journal of Finance, the Review of Economic Studies, and Econometrica.

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Liquidity Formation and Preopening Periods in Financial Markets

This paper studies the role of preopening periods in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity to be expressed. We show that introducing a preopening period enhances liquidity and welfare. At equilibrium, risk-averse insiders use the preopening period to attract latent liquidity by communicating their trading needs and/or their private information concerning an asset’s valuation. This communication avoids market breakdown because it induces savings on the cost of market participation, and because it reduces the adverse selection risk borne by the liquidity providers. We provide implications of our analysis for the estimation of transaction costs and for the design of financial markets.

Last modified: 2018.11.30.