Strategic Trading in Informationally Complex Environments

Nicolas Lambert, Michael Ostrovsky and Mikhail Panov

No 20516, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of Kyle (1985). We allow for essentially arbitrary correlations among the random variables involved in the model: the value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.

JEL-codes: D53 D82 D84 G12 G14 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-cse, nep-cta and nep-mst
Note: AP
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Citations: View citations in EconPapers (2)

Published as Nicolas S. Lambert & Michael Ostrovsky & Mikhail Panov, 2018. "Strategic Trading in Informationally Complex Environments," Econometrica, Econometric Society, vol. 86(4), pages 1119-1157, July.

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Working Paper: Strategic Trading in Informationally Complex Environments (2014)
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