Imperfect Competition in Securities Markets with Diversely Informed Traders

Huining Cao ()

No RPF-258, Research Program in Finance Working Papers from University of California at Berkeley

Abstract: We show that the infinite regression problem in models with differentially informed traders can be solved using a fixed point method which we use to derive the dynamic equilibrium in a multi-auction model with diversely informed traders. We find that when the informed traders' signals are not perfectly correlated, their private information will be revealed to the market gradually so that the market is only semi- strong form efficient and not strong-form efficient. Market depth in the continuous auction model initially increases with time but decreases to zero at the end. Our results are in contrast to the results of Holden and Subrahmanyam (1992) and Foster and Viswanathan (1993) (HS-FV) who showed that when auctions occur frequently and informed traders have perfect information, the information is revealed to the market almost immediately. However, when the correlation in the private signals goes to 1, our model converges to the HS-FV model.

Date: 1995-11-01
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