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Information chasing versus adverse selection

Gabor Pinter, Chaojun Wang () and Junyuan Zou ()
Additional contact information
Chaojun Wang: The Wharton School
Junyuan Zou: INSEAD

No 971, Bank of England working papers from Bank of England

Abstract: Contrary to the prediction of the classic adverse selection theory, a more informed trader could receive better pricing relative to a less informed trader in over‑the‑counter financial markets. Dealers chase informed orders to better position their future quotes and avoid winner’s curse in subsequent trades. When dealers are perfectly competitive and risk averse, their incentive of information chasing dominates their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market.

Keywords: Information chasing; adverse selection; over-the-counter; price efficiency (search for similar items in EconPapers)
JEL-codes: D82 G14 G18 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2022-04-08
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cta and nep-mst
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