TY - GEN

T1 - Strategic trading in informationally complex environments

AU - Lambert, Nicolas S.

AU - Ostrovsky, Michael

AU - Panov, Mikhail

N1 - Copyright:
Copyright 2014 Elsevier B.V., All rights reserved.

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 -