Information Spillovers in Asset Markets with Correlated Values

Vladimir Asriyan

No 711, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effect of information spillovers and transparency in a dynamic setting with adverse selection and correlated asset values. A trade (or lack thereof) by one seller can provide information about the quality of other assets in the market. In equilibrium, the information content of this trading behavior is endogenously determined. We show that this endogeneity of information leads to multiple equilibria when the correlation between asset values is sufficiently high. That is, if buyers expect "bad" assets to trade quickly, then a seller with a bad asset has reason to be concerned about negative information being revealed, which induces her to trade quickly. Conversely, if buyers do not expect bad assets to trade quickly, then the seller has less to be concerned about and is more willing to wait. We study the implications of the theory for policies that target market transparency (e.g., TRACE). We show that total welfare is higher when markets are fully transparent than when the market is fully opaque. However, both welfare and trading activity can decrease in the degree of market transparency.

Date: 2015
New Economics Papers: this item is included in nep-cse and nep-mic
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Information Spillovers in Asset Markets with Correlated Values (2017)
Working Paper: Information Spillovers in Asset Markets with Correlated Values (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:711

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