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Early Birds and Second Mice in the Stock Market

Julio A. Crego () and Jin Huang ()
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Julio A. Crego: Tilburg University, https://www.tilburguniversity.edu
Jin Huang: New York University Shanghai, https://shanghai.nyu.edu

Working Papers from CEMFI

Abstract: This paper studies learning in the stock market. Our contribution is to propose a model to illustrate the endogenous timing decision on trading, taking into account the incentive of learning from others about the fundamental value. The model is similar to Easley and O’Hara (1992), except that we introduce less-informed traders whose private information is inferior to fully-informed traders, but superior to that of random noise traders, and a zero-profit market maker. We also allow both types of informed traders to optimize timing of trading. We show that fully-informed traders act as early birds because it is optimal for them to buy or sell at the earliest possible time; meanwhile, less-informed traders could be better off as second mice by delaying transactions to learn from previous trades. The greater information asymmetry between the less-informed traders and the market maker, the larger profits the former could make even though the latter is learning from all trades.

Keywords: Market microstructure; insider trading; learning; strategic timing. (search for similar items in EconPapers)
JEL-codes: D83 G12 G14 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-mst
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