dynamic oligopoly with incomplete information we consider learning and signalling in a dynamic cournot oligopoly where firms have private information about their production costs and only observe the market price which is subject to unobservable demand shocks an equilibrium is markov if play depends on the history only through the firms beliefs about costs and calendar time we characterize symmetric linear markov equilibria as solutions to a boundary value problem in every such equilibrium given a long enough horizon play converges to the static complete information outcome for the realized costs but each firm only learns its competitors average cost the weights assigned to costs and beliefs under the equilibrium strategies are non monotone over time we explain this by decomposing incentives into signalling and learning and discuss implications for prices quantities and welfare

recent progress in the empirical analysis of multi unit auctions abstract i discuss some recent progress in the empirical analysis of multi unit auctions through which a number of important commodities treasury bills and bonds electricity emission permits monetary infusions by some central banks are allocated

information aggregation in common value auctions a key question in information economics and finance is whether prices aggregate information in a competitive environment that is when agents are endowed with private information does competition lead in the limit to prices which would occur if all information were public this paper examines the asymptotic properties of prices in common value auctions when the number of bidders becomes large the main idea in this paper is to separate the issue of information aggregation from the issue of revenue efficiency we also distinguish between the amount of information prices contain and the degree to which prices approximate the asset s value using this approach we get a simple characterization of the limiting distribution of prices we are not only able to answer whether prices converge to the asset s value but also get an explicit form for the limiting distribution prices converge to the expected value of the asset conditional on the information possessed by what we call the pivotal bidder this provides insights on how the auction format and the information structure influence the limiting behavior of prices it shows that the limiting distribution of prices can be derived from the statistical properties of certain order statistics this lets us abstract from the specific equilibrium bidding strategies for example we show that while the first and second price auction have different equilibrium strategies they share a similar limiting distribution of prices these auctions yield different limiting distributions from auctions such as the english auction or kn auction our

volatility spread and stock market response to earnings announcements abstract using a broad sample of earnings announcements we find a monotonic increase in the spread between call and put implied volatilities as it gets closer to the earnings announcement date the steady build up of volatility spread in the days leading up to the announcement date coupled with the predictive power of cumulative abnormal implied volatility spread on subsequent announcement returns suggests that informed traders are the driving force behind the option market activities prior to earnings announcements such informed trading as proxied by the abnormal implied volatility spread increases rather than decreases the stock market response to earnings announcements after controlling for an array of firm and announcement characteristics this effect is most pronounced when the pre earnings option trading volume is heightened overall our findings lend strong support to the notion that informed options trading immediately before earnings announcements helps alleviate the stock market under reaction to earnings announcements and make it closer to a complete response

price discovery and learning during the preopening period in the paris bourse before the opening of the paris bourse traders place orders and indicative prices are set this offers a laboratory to study empirically the t tonnement process through which markets discover equilibrium prices since preopening orders can be revised or canceled before the opening indicative prices could be noise we test this against the hypothesis that preopening prices reflect learning early in the preopening the noise hypothesis is not rejected as the opening gets closer the informational content and efficiency of prices increase and the learning hypothesis is not rejected we also propose a gmm based estimate of the speed of learning

security analysis and trading patterns when some investors receive information before others in existing models of information acquisition all informed investors receive their information at the same time this article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others the model implies that under some conditions investors will focus only on a subset of securities herding while neglecting other securities with identical exogenous characteristics in addition the model is consistent with empirical correlations that are suggestive of oft cited trading strategies such as profit taking short term position reversal and following the leader mimicking earlier trades in existing models of information acquisition all informed investors receive their information at the same time while these models provide many important insights in reality some investors either fortuitously or owing to superior skill acquire pertinent information before others by being first an investor can exploit this information to great advantage information that is uncovered only slightly later is less valuable even if it has not yet been publicly revealed we show in this article that the sequential nature of information arrival has a significant effect on both the trading decisions and the types of information collected by investors the model we develop describes the investment choices of a set of competitive risk averse investors who investigate the long term prospects of firms lucky or high ability investors uncover the

how trading institutions affect financial market performance some laboratory evidence i introduction trading institutions vary considerably across contemporary financial markets 1 but most can be classified into one of two basic types the continuous double auction da allows traders to submit public offers to buy or to sell and to accept other traders offers at any moment in time the double auction institution offers immediacy but non uniform transaction prices the other basic trading institution the clearinghouse ch gathers offers and clears them at a unified price at a pre specified time it sacrifices immediacy for uniform transaction prices 2 the two types of institutions have co existed and evolved for centuries but now are emerging in new electronic versions market participants and policy makers would like to know which institution or variant or combination is most efficient but theoretical and empirical work to date provides little guidance this paper reports on a series of laboratory asset markets experiments designed to compare variants of the double auction and clearinghouse trading institutions the markets are small usually with eight or nine traders but the traders are profit motivated and experienced with the trading institutions the traded asset has uncertain market value and traders receive useful but inconclusive private information they can only learn the asset s true value during the course of trade laboratory markets offer several advantages for empirical study of financial market institutions first private information is observable even controllable in the laboratory and therefore the investigator can directly measure market efficiency 3 second the complexity of the environment can be varied systematically in the laboratory and its effects on market performance can be separated from the effects of the market institution and other forces finally the market institution itself is controllable in the laboratory so it is possible to make valid causal inferences on how the market institution shapes market performance i begin with a survey of relevant literature and other preliminaries in the rest of this section section ii outlines the laboratory procedures the creation of trading environments of varying complexity the electronic implementation of the clearinghouse and double auction trading institutions the computation of theoretical benchmark prices and allocations and the measurement of market performance section iii collects the results following an illustrative account of a double auction trading period and a clearinghouse trading period i use descriptive statistics to summarize market performance in each of the thirty nine experiments the main conclusions are based on statistical comparisons of market performance across alternative market institutions the clearinghouse institution does surprisingly well it delivers greater market depth than the double auction discovers prices at least as efficiently and produces final allocations almost as efficient as the double auction the main institutional variants examined in this paper concern the amount of information made public regarding order placement orderflow the data suggest that public display of the orderflow enhances double auction efficiency but may impair clearinghouse efficiency a study of trading volume shows higher volume in the double auction in both institutions volume increases when important private news arrives and when the trading period is about to end the paper concludes with a brief summary and discussion of the results a companion paper friedman 1991 considers the effects of awarding various privileges to some but not all traders copeland and friedman 1987 1991 provide useful background information on laboratory procedures and computerized double auction markets instructions for the current experiments are available on request the need for empirical work a skeptic might argue that empirical work is unnecessary the mere fact that the double auction and clearinghouse institutions both persist in major financial markets implies that both are highly efficient because a more efficient institution would displace less efficient institutions

an experimental test of combinatorial information markets while a simple information market lets one trade on the probability of each value of a single variable a full combinatorial information market lets one trade on any combination of values of a set of variables including any conditional or joint probability in laboratory experiments we compare the accuracy of simple markets two kinds of combinatorial markets a call market and a market maker isolated individuals who report to a scoring rule and two ways to combine those individual reports into a group prediction we consider two environments with asymmetric information on sparsely correlated binary variables one with three subjects and three variables and the other with six subjects and eight variables thus 256 states

competitive rational expectations equilibria without apology abstract consider a financial market with n risk averse asymmetrically informed traders when n grows at the same rate as noise trading prices in competitive and in strategic rational expectations equilibrium converge to each other at a rate of 1 n equilibria in the two scenarios are close when noise trading volume per informed trader is large in relation to risk bearing capacity both equilibria converge to the competitive equilibrium of a limit continuum economy as the market becomes large at a slower rate of 1 n the results extend to endogenous information acquisition and the connections with the grossman stiglitz paradox are highlighted

on the possibility of informationally efficient markets this paper presents conditions for a resolution of the grossman stiglitz paradox of informationally efficient markets we display a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved as long as the correlation in traders valuations is not too large the equilibrium is efficient and the problems associated with fully revealing rational expectations equilibria are precluded without resorting necessarily to noise traders the robustness of the results to general information structures is established and the effect of market power is examined in a large market approximation to the competitive economy the model is applied to explain changes in bidding behavior in central bank liquidity auctions in the crisis period jel d82 d84 g14 e59

price inference in small markets this paper investigates the effects of market size on the ability of price to aggregate traders private information to account for heterogeneity in correlation of trader values a gaussian model of double auction is introduced that departs from the standard information structure based on a common fundamental shock the paper shows that markets are informationally efficient only if correlations of values coincide across all bidder pairs as a result with heterogeneously interdependent values price informativeness may not increase monotonically with market size as a necessary and sufficient condition for the monotonicity price informativeness increases with the number of traders if the implied reduction in the absolute value of an average correlation statistic of an information structure is sufficiently small

trading volume and autocorrelation empirical evidence from the stockholm stock exchange abstract in accordance with studies for other markets swedish index returns exhibit high autocorrelation a after days of above average performance of the stock market b after low absolute returns c when trading volume is low and d following fridays contrary to the non synchronous trading and the transaction cost hypotheses all results extend to individual stock returns it is concluded that autocorrelation patterns are related to the trading patterns of individual investors and not the cross security information processing of the market in particular the observed autocorrelation structure corresponds to feedback trading

equilibrium price formation and the value of private information an economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset and then choose demand functions that determine the allocation of assets it is a well known paradox that if agents are price takers and prices are fully revealing then an equilibrium with costly information acquisition does not exist it is shown that if the price formation process is modeled explicitly and agnets are not price takers then it is possible to have an equilibrium with fully revealing prices and costly information acquisition article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

market composition and price informativeness in a large market with endogenous order types we analyse the joint determination of price informativeness and the composition of the market by order type in a large asset market with dispersed information the market microstructure is one in which informed traders may place market orders or full demand schedules and where market makers set the price market order traders trade less aggressively on their information and thus reduce the informativeness of the price in a full market order market price informativeness is bounded whatever the quality of traders information about the asset s dividend when traders can choose their order type and demand schedules are even marginally costlier than market orders then market order traders overwhelm the market when the precision of private signals goes to in nity this is because demand schedules are substitutes at high levels of precision a residual fraction of demand schedule traders is sufficient to take the trading price close to traders signals while the latter is itself well aligned with the dividend hence the gain from trading conditional on the price as demand schedule traders do in addition to one s own signal as all informed traders do vanishes

disagreement and learning dynamic patterns of trade we study volume dynamics when there are disagreements among investors for that purpose we develop a dynamic model in which differences in the interpretation of public information lead to trade we obtain a simple linear equilibrium in closed form in which risk averse agents take into account future trading opportunities when solving for their optimal portfolio allocation using this framework we then study what restrictions on the disagreement process are needed to generate empirically observed patterns in volume and prices we show that having infrequent but major disagreements leads to autocorrelation in volume and correlation between volume and absolute price changes when agents disagree on past news but agree on the interpretation of current news there is learning and the convergence of agents opinions leads to trade

properties of the combinatorial clock auction the combinatorial clock auction has become popular for large scale spectrum awards and other uses replacing more traditional ascending or clock auctions we describe some surprising properties of the auction including a wide range of ex post equilibria with demand expansion demand reduction and predation our results obtain in a standard homogeneous good setting where bidders have well behaved linear demand curves and suggest some practical difficulties with dynamic implementations of the vickrey auction

tail expectation and imperfect competition in limit order book markets abstract perfect competition in liquidity provision in limit order markets is characterized by a tail expectation condition glosten 1994 in this paper we model imperfect competition in schedules by infinitely many liquidity suppliers quoting on a limit order book we show that there are zero rent mixed strategy equilibria featuring finite numbers of active liquidity suppliers none of the equilibria satisfies the competitive outcome not even on average considering a sequence of equilibria with the number of active liquidity suppliers becoming large we show that the aggregate stochastic marginal price schedule converges to the deterministic competitive marginal price schedule

market microstructure information aggregation and equilibrium uniqueness in a global game abstract speculators contemplating an attack e g on a currency peg must guess the beliefs of other speculators which they can do by looking at the stock market as shown in earlier work this information gathering process may be destabilising by creating multiple equilibria this paper studies the role played by the microstructure of the asset market in the emergence of multiple equilibria driven by information aggregation to do so we study the outcome of a two stage global game wherein an asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that affects traders decision to attack in the coordination stage of the game in the trading stage placing a full demand schedule i e a continuum of limit orders is costly but traders may use riskier and cheaper market orders i e order to sell or buy a fixed quantity of assets unconditional on the execution price price execution risk reduces traders aggressiveness and hence slows down information aggregation which ultimately makes multiple equilibria in the coordination stage less likely in this sense microstructure frictions that lead to greater individual exposure to price execution risk may reduce aggregate uncertainty by pinning down a unique equilibrium outcome

market power and information revelation in dynamic trading we study a strategic model of dynamic trading where agents are asymmetrically informed over common value sources of uncertainty there is a continuum of buyers and a finite number n of sellers all buyers are uninformed while at least one seller is privately informed about the true state of the world when n 1 full information revelation never occurs in equilibrium and the only information transmission happens in the first period with n 1 the outcome depends both on the structure of the sellers information and even more importantly on the intensity of competition allowed by the existing trading rules when there is intense competition absence of clienteles information is fully and immediately revealed to the buyers in every equilibrium for n large enough regardless of the number of informed sellers on the other hand for trading arrangements characterized by less intense forms of competition presence of clienteles for any n we always have equilibria where information is never fully revealed moreover in that case when only one seller is informed for many parameter configurations there are no equilibria with full information revelation even for large n jel c72 c78 d82 d83

direct sale of information when precision is unobservable this paper studies the incentives of an information seller to produce precise information in a setting where precision is not observable and investors with rational expectations can extract information from the equilibrium asset price i show that the seller can verify her unknown precision by employing a nonlinear contract proposed by bhattacharya and p eiderer 1985 although precision is not observable buyers can perfectly deduce it from the contract apart from incentives to produce precise information and reveal it truthfully the nonlinear contract also insures against the portfolio risk of information buyers and causes them to trade aggressively for a given precision this increases the extent of information that is built into the equilibrium asset price the seller s equilibrium fee depends on i her inferred precision ii the value of portfolio insurance for buyers and iii the extent of information that leaks from the equilibrium asset price

insider trading without normality in this paper we analyse the existence and uniqueness of equilibrium in a particular class of monopolistic rational expectations models we show the equivalence between the kyle 1985 model of insider trading where the insider observes the amount of noise trading and the kyle 1989 model of informed speculation when there is one risk neutral insider and many risk neutral market makers we show that in these two equivalent models i there exists a unique equilibrium independently of the distribution of uncertainty ii this equilibrium minimizes the expected gains of the informed agent under incentive compatibility constraints we extend our results to a class of signalling games

full implementation and belief restrictions we introduce a framework to study the problem of full implementation under general restrictions on agents beliefs which we call implementation first we provide a characterization of the properties of the mechanisms that achieve implementation these conditions relate the possibility of achieving full implementation to the strength of the strategic externalities induced by the mechanism we then study how to achieve full implementation via the design of simple transfer schemes in these context the general conditions for implementation suggest a simple design principle in which belief restrictions are used to weaken the strategic externalities induced by the baseline transfers of the belief free benchmark importantly our results require minimal information on agents beliefs which regard simple moments of the distribution of types these moment conditions arise naturally in applications and in practical problems of mechanism design

risk arbitrage in takeovers this article studies the role of risk arbitrageurs in takeovers and the source of their advantage we show how the presence of arbitrageurs affects the value of the target shares since arbitrageurs are more likely to tender therefore an arbitrageur has the informational advantage of knowing he bought shares in equilibrium the number of arbitrageurs buying shares and the price they pay are determined endogenously we also present several empirical implications including the relationship among trading volume takeover premium liquidity of the shares and the number of risk arbitrageurs investing in one particular deal copyright 2002 oxford university press

high frequency trading competition we analyze trading dynamics as successive high frequency trading hft firms begin to trade stocks in an equity market entrants compete with incumbents for volume and there is crowding out

endogenous market thinness and stock price volatility thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements the resulting volatility can induce risk averse transactors who face transaction costs to desert these markets thus thinness and the related price volatility may become joint self perpetuating features of an equity market irrespective of the volatility of asset fundamentals if however appropriate incentive schemes are adopted to encourage entry by additional investors this vicious circle can be broken eventually shifting the market to a selfsustaining superior equilibrium characterized by a higher number of transactors lower price volatility and larger supply of the asset a number of empirical studies cohen et al 1976 telser and higimbotham 1977 pagano 1986 tauchen and pitts 1983 have found that thin speculative markets are ceteris paribus more volatile than deep ones a plausible explanation for this finding is that thin markets are generally characterized by small numbers of transactors per unit time and thus their prices are more sensitive to the impact of individual traders demand shocks conversely in deep markets transactors are so many that the uncorrelated demand shocks experienced by individual traders tend to offset each other and leave market prices largely unaffected while this suggests a rationale for the observed relationship between market size and price volatility it does so by taking market size as the exogenous factor however the volatility of a speculative market may feed back on its size in the sense that the high liquidation risk implied by very volatile prices can induce potential entrants to keep out of the market this paper shows that in a stock market with transaction costs this interaction between thinness and volatility can produce multiple steady state equilibria some characterized by low trade and high volatility and others by high trade and low volatility whether the market will settle in one equilibrium or another depends entirely on the expectations held by economic agents sections 2 and 3 the existence of these multiple bootstrap equilibria can be explained heuristically as follows each additional trader generates a positive externality for other actual or potential traders by decreasing the riskiness of the stock lower risk in turn tends to attract more investors with the effect of raising stock prices and inducing corporations to issue additional equity we thus have a feedback loop between market size and price volatility where market size is measured both along the dimension of the number of traders and along that of the total stock of equities if however investors face transactions costs in the stock market this positive feedback may fail to be operative if the volume of trade is expected to be small investors with relatively high transaction costs will abstain from trading thus the market

sources of variation in international real interest rates this paper analyses the effects of inflation on ex post real interest rates in an international framework a dynamic factor model is estimated in which real interest rates are influenced by real interest and inflation factors that are common to all the countries and by country specific factors we find that the source of domestic inflation is an important determinant of the effect of inflation on real interest rates a common inflation factor has a negative effect on ex post real interest rates lending support to a form of the mundell tobin effect in international real interest rates and that a country specific inflation factor tends to have a positive effect

underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets an experimental study abstract in contrast to existing literature we implement experimental asset markets with fluctuating fundamental values following a stochastic process therefore we can measure traders behavior in both bullish and bearish markets we observe underreaction of price changes to changes in fundamental value which induces overvaluation in bearish and undervaluation in bullish markets we also find an asymmetry between markets with bullish fundamental values and those with bearish ones as the former markets show a higher degree of informational efficiency the reason for the observed underreaction lies in the relatively large volatility of the underlying fundamental value process

toward a strategic foundation for rational expectations equilibrium a step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with n buyers and m sellers with interdependent values and affiliated private information if there are sufficiently many buyers and sellers and their bids are restricted to a sufficiently fine discrete set of prices then generically there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents in particular the large double auction equilibrium is almost efficient and almost fully aggregates the agents information

does society benefit from investor overconfidence in the ability of financial market experts abstract this paper develops a securities market model in which participants beliefs diverge and prices are monotonic in beliefs relative to rational expectations i e correct and unanimous beliefs overconfidence among uninformed traders about the precision of experts information leads to pareto superior equilibria efficiency enhancing departures from rational expectations occur over a dense subset of parameter space but only for one configuration of beliefs uninformed traders must be more confident than informed experts overconfidence in the form of excessive trust in the predictive ability of experts sets off a virtuous cycle of increased trading that improves liquidity and reduces transaction costs for everyone

collusion in a three tier hierarchy credible beliefs and pure self interest abstract the assumption of a purely self interested supervisor in the principal supervisor agent framework gives rise to the possibility of supervisor agent collusion in this paper i show that equilibrium refinement assumptions on type belief updating during side contract negotiations can guarantee that collusion occurs even if the principal is allowed to manipulate the incentives in the contract he offers the only way to prevent collusion is to ignore the supervisor thus the role of a purely self interested supervisor in this case is questioned lastly i discuss some plausible alternatives and explanations of the assumption of pure self interest

noise trading and takeovers a model of takeovers is investigated in which noise trading provides camouflage that makes it possible for a large corporate outsider to purchase enough shares at favorable prices so that takeovers become profitable although the model accommodates the possibility of dilution grossman and hart 1980 and a large incumbent shareholder shleifer and vishny 1986 neither dilution nor a large incumbent shareholder is necessary for costly takeovers to be profitable noise trading tends to encourage costly takeovers that otherwise would not occur and to discourage beneficial takeovers that otherwise would occur

mechanism choice and strategic bidding in divisible good auctions an empirical analysis of the turkish treasury auction market we propose an estimation method to bound bidders marginal valuations in discriminatory auctions using individual bid level data and apply the method to data from the turkish treasury auction market using estimated bounds on marginal values we compute an upper bound on the inefficiency of realized allocations as well as bounds on how much additional revenue could have been realized in a counterfactual uniform price or vickrey auction we conclude that switching from a discriminatory auction to a uniform price or vickrey auction would not significantly increase revenue moreover such a switch would increase bidder expected surplus by at most 0 02 percent

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

asset auctions information and liquidity a model is presented of a uniform price auction where bidders compete in demand schedules the model allows for common and private values in the absence of exogenous noise it is shown how private information yields more market power than the levels seen with full information results obtained here are broadly consistent with evidence from asset auctions may help explain the response of central banks to the crisis and suggest potential improvements in the auction formats of asset auctions jel d44 d82 g14 e58

an evolutionary approach to financial innovation the purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged to this end we model an infinite sequence of capm economies in which financial products can be used for insurance purposes agents participation in these financial products however is restricted consecutive stage economies are linked by a mapping transition function which determines the next period s participation structure from the preceding period s participation the transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted we then analyse the evolutionary stability of stationary equilibria in accordance with the empirical literature on financial innovation it is obtained that the success of a financial innovation a mutation depends on a sufficiently high trading volume marketing and new and differentiated hedging opportunities in particular a set of complete markets forming a stationary equilibrium is robust with respect to any further financial innovation while this is not necessarily true for a set of incomplete markets

learning and price discovery in a search market we introduce learning into an otherwise standard two sided search and bargaining market there is uncertainty about the price distribution due to uncertainty about an underlying exogenous state of relative demand in the high state buyers are on the long side otherwise they are on the short side in equilibrium prices are on average higher in the high state individual agents learn about the distribution while searching agents typically start out by experimenting with a tough bargaining position buyers may initially insist on a low price and sellers on a high price after successive failures to trade agents become increasingly pessimistic about the market conditions and soften their bargaining stance when frictions are small equilibrium transaction prices are approximately market clearing despite aggregate demand being unknown thus the search and bargaining procedure enables price discovery in a decentralized market

information trade and derivative securities hellwig s 1980 model is used to analyze the value of improving trading opportunities by more frequent trading in the underlying asset or by trading in a derivative asset with multiple trading sessions uninformed investors behave as rational trend followers while more informed investors follow a contrarian strategy as trading becomes continuous pareto efficiency is achieved with trading in an appropriate derivative security pareto efficiency may be achieved in only a single round of trading all derivative claims are then priced on black and scholes 1973 principles and in the absence of further supply shocks no trading will take place in subsequent trading rounds article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

does risk sharing motivate interdealer trading we use unique data from the london stock exchange to test whether interdealer trade facilitates inventory risk sharing among dealers we develop a methodology that focuses on periods of extreme inventories inventory cycles we further distinguish between inventory cycles that are unanticipated and those that are anticipated because of worked orders the pattern of interdealer trade during inventory cycles matches theoretical predictions for the direction of trade and the inventories of trade counterparts we also show that london dealers receive higher trading revenues for taking larger positions

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

j shaped returns to timing advantage in access to information experimental evidence and a tentative explanation abstract the question of how useful information is in financial markets has been discussed for decades and is still unresolved in this paper we challenge the widely held belief that additional information is never a disadvantage we present results from experimental financial markets with asymmetrically informed traders in all treatments we conduct we find a j shaped distribution of returns while the best informed outperform all others average informed traders have significantly lower returns than the least informed this can mainly be attributed to trend reversals in the fundamental information prices in our markets do not reflect ree but rather naive trader equilibrium

making money out of publicly available information we study a version of the standard kyle 85 model with endogenous information acquisition and we find that equilibria exist with free entry in which speculators make positive profits moreover these equilibria are robust

differential information and dynamic behavior of stock trading volume this article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock investors trade competitively in the stock market based on their private information and the information revealed by the market clearing prices as well as other public news we examine how trading volume is related to the information flow in the market and how investors trading reveals their private information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

price volatility without news about fundamentals abstract in a pseudo dynamic model financial prices can exhibit chaotic volatility even when there is no fluctuation in economic fundamentals the source of the volatility is some speculative trading rule

institutionalization delegation and asset prices abstract we study the effects of institutionalization on fund manager compensation and asset prices institutionalization raises the performance sensitive component of the equilibrium contract which makes institutional investors effectively more risk averse institutionalization affects market outcomes through two opposing effects the direct effect is to bring in more informed capital and the indirect effect is to make each institutional investor trade less aggressively on information through affecting the equilibrium contract when there are many institutions and little noise trading in the market the indirect contracting effect dominates the direct informed capital effect in determining market variables such as the cost of capital return volatility price volatility and market liquidity otherwise the direct informed capital effect dominates

is there an interest rate speculation relationship evidence from g7 in the pre and post 2008 crisis abstractthe article revisits the is lm macroeconomic model by incorporating speculation into the investment function the discussion is supported empirically by using data from the g7 countries to examine the different interest rate regimes in the pre and post 2008 financial crisis the estimation of an anchor interest rate provides a reference rate for the g7 countries the empirical study is extended to examine if the three quantitative easing qe episodes in the u s are growth promoting the article concludes that the maintenance of a high and stable interest rate policy is needed for sustainable growth in the g7 countries

risk allocation and inter dealer trading this paper contrasts an auction and a dealership market in the latter parallel to the public market market makers are allowed to trade with each other in a separate inter dealer market since market makers are assumed to be risk averse variations in asset holdings induced by trades with outside investors generate portfolio hedging trade we find that the price at which market makers trade with each other in the inter dealer market determines the prices quoted in the public market for outside investors it is shown that an investor gets a better price in the dealership market as long as the market makers and speculators are imperfectly competitive and the delay between executing the customer s order and trading in the inter dealer market is not too large

the optimal design of a market we study the optimal design of the rules of trade in a two period market given that agents arrive at different times and may only trade with agents present contemporaneously first period agents face a fixed cost of trading across periods given the non convexities associated with the fixed cost competitive trading rules can result in inefficiencies in such a market and anonymity must be sacrificed to achieve efficiency efficient trading rules have a market maker who is given a monopoly right to trade across periods who faces some competition within period trading but not across periods the efficient choice of who should be market maker can be made by auctioning rights to this position with uncertainty across periods efficient mechanisms may involve multiple market makers and the optimal number of market makers depends on the cost of trading level of risk aversion and presence of asymmetric information journal of economic literature classification numbers d40 d78 g10

are more risk averse agents more optimistic insights from a rational expectations model we analyze the link between pessimism and risk aversion we consider a model of partially revealing competitive rational expectations equilibrium with diverse information in which the distribution of risk aversion across individuals is unknown we show that when a high individual level of risk aversion is taken as a signal for a high average level of risk aversion more risk averse agents are more optimistic this correlation between individual risk aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk risk sharing schemes and welfare implications are analyzed we show that agents welfare may increase upon the receipt of more precise information

nonlinear incentive provision in walrasian markets a cournot convergence approach abstract the paper studies insurance with moral hazard in a system of contingent claims markets insurance buyers are modelled as cournot monopolists or oligopolists the other agents condition their expectations on market prices as in models of rational expectations equilibrium with asymmetric information thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers net trades when there are many agents to share the insurance buyers risks cournot equilibrium outcomes are close to being second best in contrast if insurance buyers are price takers equilibria fail to exist or are bounded away from being second best

information and strategic behavior abstract does encouraging trader participation enhance market competitiveness this paper shows that when trader preferences are interdependent trader market power does not necessarily decrease with greater participation and traders need not become price takers in large markets thus larger markets can be less liquid and associated with lower ex ante welfare in the linear normal model the necessary and sufficient condition on the information structure is provided under which price impact is monotone in market size a condition is given when the rational expectations equilibrium which is typically not fully revealing within the considered class of preference interdependencies is obtained in large markets

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

a manipulator can aid prediction market accuracy prediction markets are low volume speculative markets whose prices offer informative forecasts on particular policy topics observers worry that traders may attempt to mislead decision makers by manipulating prices we adapt a kyle style market microstructure model to this case adding a manipulator with an additional quadratic preference regarding the price in this model when other traders are uncertain about the manipulator s target price the mean target price has no effect on prices and raising the variance of the target price can increase average price accuracy by boosting the returns to informed trading and thereby incentives for traders to become informed

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed