Strategic trading and welfare in a dynamic market

Dimitri Vayanos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behavior increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order 1/N, and not 1/N² as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.

Keywords: JEL classification codes : C73; D44; G11 (search for similar items in EconPapers)
JEL-codes: C73 D44 G11 (search for similar items in EconPapers)
Date: 1999-04
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Citations: View citations in EconPapers (68)

Published in Review of Economic Studies, April, 1999, 66(2), pp. 219-254. ISSN: 0034-6527

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Related works:
Journal Article: Strategic Trading and Welfare in a Dynamic Market (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:449

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