Asset price manipulation with several traders

Ansgar Walther

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: In financial markets with asymmetric information, traders may have an incentive to forgo profitable deals today in order to preserve their informational advantage for future deals. This sort of manipulative behaviour has been studied in markets with one informed trader (Kyle 1985, Chakraborty and Yilmaz 2004). The effect is slower social learning. Using an extension of Glosten and Milgrom’s (1985) trading model, we study this effect in markets with N informed traders. As N grows large, each trader’s price impact subsides, and so does manipulation in equilibrium. However, the impact of manipulation on social learning can be increasing in N. As N increases, each trader individually manipulates less. But nonetheless, the increased number of manipulative actions introduces enough noise to exacerbate the impact of manipulation on learning.

Keywords: Price manipulation; asset pricing; asymmetric information; Glosten-Milgrom model (search for similar items in EconPapers)
JEL-codes: D80 D82 G10 G14 (search for similar items in EconPapers)
Date: 2012-10-08
New Economics Papers: this item is included in nep-cta, nep-mic and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1242

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