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Clustering on the same news sources in an asset market

Nathan Larson

MPRA Paper from University Library of Munich, Germany

Abstract: We study the incentives to acquire information from exclusive news sources versus information from popular sources in a CARA-normal asset market. Each trader is able to observe one of a finite number of news sources. Clustering on the most precise source can happen for two reasons. One is standard: traders do not care that they dilute others’ profits by trading on the same information. The other reason is more novel: traders with different information sets may respond to the same news differently — when this is so, they can benefit by coordinating their attention on the same news source in order to take opposite sides of the market. News from such a source will generate abnormal volume that need not be accompanied by large price movement. Furthermore, we show that as the number of sources grows, traders concentrate their attention on a few of the best ones, leaving most information unexploited.

Keywords: information acquisition; herding; abnormal volume; market order; limit order (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2011-08-11
New Economics Papers: this item is included in nep-cfn and nep-mst
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