Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Vincent Glode, University of Pennsylvania
Dynamic Information Acquisition and Strategic Trading
AbstractConsider a strategic trader who dynamically chooses when to acquire costly information about an asset's payoff, instead of being endowed with this information. Whether the market maker observes acquisition is critical. Without observability, we show that an equilibrium with smooth trading and a pure acquisition strategy cannot exist. We also rule out the existence of a natural class of mixed-strategy equilibria. With observability, however, there exists an equilibrium in which optimal acquisition follows a pure strategy and generally exhibits delay. Our results suggest that many strategic trading equilibria considered in the literature are difficult to reconcile with dynamic information acquisition.
Speculation With Information Disclosure
AbstractSophisticated financial market participants frequently choose to disclose private information to the public --- a phenomenon inconsistent with most theories of speculative trading. In this paper, we propose and test a model to bridge this gap. We show that when a speculator cares about both the short-term value of her portfolio and her long-term profit, information disclosure is incentive compatible: Disclosure in the form of a mixture of fundamental information and the speculator’s position induces competitive dealership to revise prices in the direction of the speculator’s position. Using mutual fund disclosure through newspaper articles, we find that when fund managers have stronger estimated short-term incentives, the frequency of strategic disclosures about stocks in their portfolios increases and those stocks’ liquidity improves, consistent with our model.
- G1 - General Financial Markets