Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

Jie Lu and Bruce Mizrach ()
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Jie Lu: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.

Keywords: chat room; strategic information (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2007-01-08
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Persistent link: http://EconPapers.repec.org/RePEc:rut:rutres:200701

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