Strategic trading in informationally complex environments

Nicolas S. Lambert, Michael Ostrovsky, Mikhail Panov

    Research output: Chapter in Book/Report/Conference proceedingConference contribution

    Abstract

    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.

    Original languageEnglish (US)
    Title of host publicationEC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation
    PublisherAssociation for Computing Machinery
    Pages3-4
    Number of pages2
    ISBN (Print)9781450325653
    DOIs
    StatePublished - 2014
    Event15th ACM Conference on Economics and Computation, EC 2014 - Palo Alto, CA, United States
    Duration: Jun 8 2014Jun 12 2014

    Publication series

    NameEC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation

    Other

    Other15th ACM Conference on Economics and Computation, EC 2014
    CountryUnited States
    CityPalo Alto, CA
    Period6/8/146/12/14

    Keywords

    • financial market
    • information aggregation
    • kyle model

    ASJC Scopus subject areas

    • Computer Science (miscellaneous)

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  • Cite this

    Lambert, N. S., Ostrovsky, M., & Panov, M. (2014). Strategic trading in informationally complex environments. In EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation (pp. 3-4). (EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation). Association for Computing Machinery. https://doi.org/10.1145/2600057.2602842