Security prices and market transparency: The role of prior information

This paper analyzes the role of traders´priors (proper versus improper) on the implications of market transparency by comparing a pre-trade transparent market with an opaque market in a set-up based on Madhavan (1996). We show that prices may be more informative in the opaque market, regardles of how priors are modelled. In contrast, the comparison of market ligquidity and volatility in the two market structures are affected by prior specification