Strategic Trading in Informationally Complex Environments

Nicolas S. Lambert, Michael Ostrovsky, Mikhail Panov

    Research output: Contribution to journalArticlepeer-review

    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 value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties with a number of applications. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.

    Original languageEnglish (US)
    Pages (from-to)1119-1157
    Number of pages39
    JournalEconometrica
    Volume86
    Issue number4
    DOIs
    StatePublished - 2018

    Keywords

    • Information aggregation
    • efficient market hypothesis
    • market microstructure
    • rational expectations equilibrium
    • strategic trading

    ASJC Scopus subject areas

    • Economics and Econometrics

    Fingerprint Dive into the research topics of 'Strategic Trading in Informationally Complex Environments'. Together they form a unique fingerprint.

    Cite this