Information Spillovers in Asset Markets with Correlated Values
William Fuchs and
No 827, Working Papers from Barcelona Graduate School of Economics
We study information spillovers in a dynamic setting with privately informed traders and correlated asset values. A trade of one asset (or lack thereof) can provide information about the value of other assets. The information content of trading behavior is endogenously determined in equilibrium. We show that this endogeneity leads to multiple equilibria when the correlation between asset values is sufficiently high. The equilibria are ranked in terms of both trade volume and efficiency. We study the implications for policies that target market transparency as well as the market's ability to aggregate information. Total welfare is higher in any equilibrium of a fully transparent market than in a fully opaque one. However, both welfare and trading activity can decrease in the degree of market transparency. If traders have asymmetric access to transaction data, transparency levels the playing eld, reduces the rents of more informed traders, but may also reduce total welfare. Moreover, even in a fully transparent market, information is not necessarily aggregated as the number of informed traders becomes arbitrarily large.
Keywords: asymmetric Information; information spillovers; market transparency; liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
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Journal Article: Information Spillovers in Asset Markets with Correlated Values (2017)
Working Paper: Information spillovers in asset markets with correlated values (2016)
Working Paper: Information Spillovers in Asset Markets with Correlated Values (2015)
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