TY - GEN
T1 - Strategic trading in informationally complex environments
AU - Lambert, Nicolas S.
AU - Ostrovsky, Michael
AU - Panov, Mikhail
PY - 2014
Y1 - 2014
N2 - We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of [Kyle 1985]. We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.
AB - We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of [Kyle 1985]. We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.
KW - financial market
KW - information aggregation
KW - kyle model
UR - http://www.scopus.com/inward/record.url?scp=84903197872&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84903197872&partnerID=8YFLogxK
U2 - 10.1145/2600057.2602842
DO - 10.1145/2600057.2602842
M3 - Conference contribution
AN - SCOPUS:84903197872
SN - 9781450325653
T3 - EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation
SP - 3
EP - 4
BT - EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation
PB - Association for Computing Machinery
T2 - 15th ACM Conference on Economics and Computation, EC 2014
Y2 - 8 June 2014 through 12 June 2014
ER -