Bluffing: an equilibrium strategy

Fabrice Rousseau

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: The present work studies the behavior of a monopolistic informed trader in a two-period competitive dealer market. We show that the informed trader may engage in stock price manipulation as a result of the exploitation of his informational advantage (sufficient conditions are provided). The informed trader achieves this manipulation by not trading in the first period according to the information received. This trader attempts to jam his signal or to bluff. In equilibrium this behavior is anticipated by the market maker, but still the informed continues to bluff with a positive probability. Equilibria with bluffing behavior are mixed strategies equilibria where the informed both follows and jams his information with positive probabilities. We also show that under those sufficient conditions, a pure strategy equilibrium where the informed does not bluff does not exist.

Keywords: Trade-Based Manipulation; Bluffing; Dealer Market. (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Pages: 35 pages
Date: 1999-11
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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n981099

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