Strategic trading and unobservable information acquisition

Snehal Banerjee and Bradyn Breon-Drish

Journal of Financial Economics, 2020, vol. 138, issue 2, 458-482

Abstract: We allow a strategic trader to choose when to acquire information about an asset’s payoff, instead of endowing her with it. When the trader dynamically controls the precision of a flow of information, the optimal precision evolves stochastically and increases with market liquidity. Because the trader exploits her information gradually, the equilibrium price impact and market uncertainty are unaffected by her rate of acquisition. If she pays a fixed cost to acquire “lumpy” information at a time of her choosing, the market can break down: we show that no equilibria exist with endogenous information acquisition. Our analysis suggests caution when applying insights from standard strategic trading models to settings with information acquisition.

Keywords: Dynamic information acquisition; Strategic trading; Observability; Commitment (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:2:p:458-482

DOI: 10.1016/j.jfineco.2020.05.007

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