MARKET MICROSTRUCTURE, INFORMATION AGGREGATION AND EQUILIBRIUM UNIQUENESS IN A GLOBAL GAME

Edouard Challe and Edouard Chrétien
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Edouard Chrétien: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper studies the outcome of a two-stage global game wherein a market-based asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that a¤ects traders' decisions in the coordination stage of the game. The microstructure of the trading stage is one in which informed traders may place market orders –rather than full demand schedules– and where a competitive market-making sector sets the price. Because market-order traders face price execution risk, they trade less aggressively on their private information than demand-schedule traders, which slows down information aggregation and limits the informativeness of the asset price. When all traders place market orders, the precision of the price signal is bounded above and the outcome of the coordination stage is unique as the noise in the private signals vanishes. More generally, in an asset market with both market-order and demand-schedule traders, the presence of the former may drastically limit the range of parameters leading to multiple equilibria. This is especially true when traders optimise over their type of order, in which case market-order traders tend to overwhelm the market when the precision of the private signal is large.

Keywords: Market microstructure; Information aggregation; Global game JEL Codes: C72; D82; G14 (search for similar items in EconPapers)
Date: 2015-07-24
New Economics Papers: this item is included in nep-mic and nep-mst
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Related works:
Journal Article: Market microstructure, information aggregation and equilibrium uniqueness in a global game (2018)
Working Paper: Market microstructure, information aggregation and equilibrium uniqueness in a global game (2018)
Working Paper: Market microstructure, information aggregation and equilibrium uniqueness in a global game (2018)
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