Dynamics of Research and Strategic Trading

Snehal Banerjee and Bradyn Breon-Drish

The Review of Financial Studies, 2022, vol. 35, issue 2, 908-961

Abstract: We study how dynamic research affects information acquisition in financial markets. In our strategic trading model, the trader performs costly research to generate private information but does not always succeed. Optimal research activity responds to market conditions and generates novel implications. First, more frequent public disclosures can “crowd in” private information acquisition, increase price informativeness, and harm liquidity, instead of “leveling the playing field.” Second, observed research activity does not necessarily imply that traders are better informed. Finally, improvements in research effectiveness or higher market participation by uninformed investors can simultaneously increase price informativeness and liquidity.

JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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