Abstract

This paper reviews the theory of market microstructure rigorously with the objective to relate it to the rationality as defined by the economic maxims and as defined by Fama, efficient market hypotheses and to infer what the theory has to say about the opportunity to beat the stock markets.   It was found that the concept of rationality as defined by the economic maxims is inherent in dealer’s optimization problem, multiple provider of liquidity and the information based model.  While the concept of rationality as defined by Fama is embedded in the later development in information based model that considers private information as another source of risk for non informed investors.  Efficient market hypotheses is linked to the dealer’s optimization problem and information based model.

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