Information linkages in a financial market with imperfect competition

Youcheng Lou and Yaqing Yang

Journal of Economic Dynamics and Control, 2023, vol. 150, issue C

Abstract: This study proposes a tractable imperfectly competitive economy where traders are socially connected with each other via an information network. We investigate the impact of information linkages on market equilibrium outcomes. In the linear-quadratic-normal framework, we first establish the existence and uniqueness of symmetric linear Bayesian Nash equilibrium. We then show that an increase of the level of information linkages decreases price impact, belief disagreement, return volatility and trading volume. Additionally, unlike the non-monotonicity results in large economies, we also show that increasing the level of information linkages always improves liquidity, increases price volatility, and decreases trading profits in our imperfectly competitive economy.

Keywords: Information linkages; Imperfect competition; Market Equilibrium Outcomes (search for similar items in EconPapers)
JEL-codes: D43 D82 D85 G11 G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:150:y:2023:i:c:s0165188923000490

DOI: 10.1016/j.jedc.2023.104643

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