Information and Trading: New Approaches to Classical Problems

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Sheraton Ballroom IV
Hosted By: American Finance Association
  • Chair: Haoxiang Zhu, Massachusetts Institute of Technology

Multiple Equilibria in Noisy Rational Expectations Economies

Domotor Palvolgyi
,
University of Cambridge
Gyuri Venter
,
Copenhagen Business School

Abstract

This paper studies equilibrium uniqueness in standard noisy rational expectations economies with asymmetric or differential information `a la Grossman and Stiglitz (1980) and Hellwig (1980). We show that the standard linear equilibrium of Grossman and Stiglitz (1980) is the unique equilibrium with a continuous price function. However, we also construct a tractable class of equilibria with discontinuous prices that have very different economic implications, including (i) jumps and crashes, (ii) significant revisions in uninformed belief due to small changes in the market price, (iii) “upward-sloping” demand curves, (iv) higher prices leading to future returns that are higher in expectation (price drift) and (v) more positively skewed. Discontinuous equilibria can be arbitrarily close to being fully-revealing. Finally, discontinuous equilibria with the same construction also exist in Hellwig (1980).

Identifying Information Asymmetry in Securities Markets

Kerry Back
,
Rice University
Kevin Crotty
,
Rice University
Tao Li
,
City University of Hong Kong

Abstract

We propose and estimate a model of endogenous informed trading that is a hybrid of the PIN and Kyle models. When an informed trader trades optimally, both returns and order flows are needed to identify information asymmetry parameters. Empirically, relationships between the model's estimates and price impacts, excess kurtosis, and volatility are consistent with theory. The estimates can be used to detect information events in the time series and to characterize the information content of prices in the cross section. Relative to price impact benchmarks, a composite measure from the model compares favorably to those from other structural information asymmetry models.

Intraday Trading Invariance in the E-mini S&P 500 Futures Market

Torben Andersen
,
Northwestern University
Oleg Bondarenko
,
University of Illinois-Chicago
Albert Kyle
,
University of Maryland
Anna Obizhaeva
,
New Economic School

Abstract

The intraday trading patterns in the E-mini S&P 500 futures contract between January 2008 and November 2011 are consistent with the following invariance relationship: The return variation per transaction is log-linearly related to trade size, with a slope coefficient of -2. This association applies both across the pronounced intraday diurnal pattern and across days in the time series. The documented factor of proportionality deviates sharply from prior hypotheses relating volatility to transactions count or trading volume. Intraday trading invariance is motivated a priori by the intuition that market microstructure invariance, introduced by Kyle and Obizhaeva (2016) to explain bets at low frequencies, also applies to transactions over high intraday frequencies.
Discussant(s)
Liyan Yang
,
University of Toronto
Vyacheslav Fos
,
Boston College
Bryan Kelly
,
University of Chicago
JEL Classifications
  • G1 - Asset Markets and Pricing