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Communication Dilemma in Speculative Markets

Nevzat Eren () and Han Ozsoylev ()

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.

New Economics Papers: this item is included in nep-fmk and nep-mst
Date: 2006
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