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Information Aggregation and Strategic Trading in Speculative Markets

Prajit Kumar Dutta

Title:
Information Aggregation and Strategic Trading in Speculative Markets
Author(s):
Dutta, Prajit Kumar
Date:
Type:
Working papers
Department:
Economics
Permanent URL:
Series:
Department of Economics Discussion Papers
Part Number:
665
Publisher:
Department of Economics, Columbia University
Publisher Location:
New York
Abstract:
This paper examines the process by which private information is impounded in security prices in a market where some traders are consistently better informed about short-run asset values. We analyze equilibria where traders can adopt general non-cooperative strategies, and characterize the 'best' attainable equilibrium. Trading strategies in this equilibrium are nonlinear functions of information signals and exhibit history dependence. In contrast to previous papers, competition among informed traders need not lead to rapid revelation of private information. Although the volatility of fundamental prices is constant, transaction prices may exhibit time-varying volatility. Finally, in contrast to linear models, the degree to which prices impound private information depends on the signal itself.
Subject(s):
Economics
Item views:
141
Metadata:
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