Strategic Behaviour and Price Discovery

Luis Medrano and Xavier Vives

No 1768, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper analyses the effects of strategic behaviour by an insider in a price discovery process, akin to an information tâtonnement, in the presence of a competitive informed sector. Such processes are used in the pre-opening period of continuous trading systems in several exchanges. It is found that the insider manipulates the market using a contrarian strategy in order to neutralize the effect of the trades of competitive informed agents. Furthermore, consistent with the empirical evidence available, we find that information revelation accelerates close to the opening; that the market price does not converge to the fundamental value no matter how many rounds the tâtonnement has; and that the expected trading volume displays a U-shaped pattern. We also find that a market with a larger competitive sector (smaller insider) has an improved informational efficiency and an increased trading volume. The insider provides a public good (reducing the informativeness of the price) for the competitive informed sector.

Keywords: contrarian behaviour; information tâtonnement; insider training; market manipulation; market microstructure; preopening auction (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Date: 1997-12
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Related works:
Journal Article: Strategic Behavior and Price Discovery (2001)
Working Paper: Strategic Behavior and Price Discovery (1998)
Working Paper: Strategic behavior and price discovery (1997)
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