Risk aversion, market liquidity, and price efficiency

A model of a noncompetitive speculative market is analyzed inwhich privately informed traders and market makers are riskaverse. Market liquidity is found to nonmonotonic in the numberof informed traders, their degree of risk aversion, and theprecision of their information. It is also shown that increasedliquidity trading leads to reduced priced efficiency, and that,under endogenous information acquisition, market liquidity mayalso be nonmonotonic in the variance of liquidity trades.