### Abstract

We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of [Kyle 1985]. We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.

Original language | English (US) |
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Title of host publication | EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation |

Publisher | Association for Computing Machinery |

Pages | 3-4 |

Number of pages | 2 |

ISBN (Print) | 9781450325653 |

DOIs | |

State | Published - 2014 |

Event | 15th ACM Conference on Economics and Computation, EC 2014 - Palo Alto, CA, United States Duration: Jun 8 2014 → Jun 12 2014 |

### Other

Other | 15th ACM Conference on Economics and Computation, EC 2014 |
---|---|

Country | United States |

City | Palo Alto, CA |

Period | 6/8/14 → 6/12/14 |

### Fingerprint

### Keywords

- financial market
- information aggregation
- kyle model

### ASJC Scopus subject areas

- Computer Science (miscellaneous)

### Cite this

*EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation*(pp. 3-4). Association for Computing Machinery. https://doi.org/10.1145/2600057.2602842

**Strategic trading in informationally complex environments.** / Lambert, Nicolas S.; Ostrovsky, Michael; Panov, Mikhail.

Research output: Chapter in Book/Report/Conference proceeding › Conference contribution

*EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation.*Association for Computing Machinery, pp. 3-4, 15th ACM Conference on Economics and Computation, EC 2014, Palo Alto, CA, United States, 6/8/14. https://doi.org/10.1145/2600057.2602842

}

TY - GEN

T1 - Strategic trading in informationally complex environments

AU - Lambert, Nicolas S.

AU - Ostrovsky, Michael

AU - Panov, Mikhail

PY - 2014

Y1 - 2014

N2 - We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of [Kyle 1985]. We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.

AB - We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of [Kyle 1985]. We allow for essentially arbitrary correlations among the random variables involved in the model: the true value of the traded asset, the signals of strategic traders, the signals of competitive market makers, and the demand coming from liquidity traders. We first show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this equilibrium characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If the demand from liquidity traders is uncorrelated with the true value of the asset or is positively correlated with it (conditional on other signals), then prices in large markets aggregate all available information. If, however, the demand from liquidity traders is negatively correlated with the true value of the asset, then prices in large markets aggregate all available information except that contained in liquidity demand.

KW - financial market

KW - information aggregation

KW - kyle model

UR - http://www.scopus.com/inward/record.url?scp=84903197872&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84903197872&partnerID=8YFLogxK

U2 - 10.1145/2600057.2602842

DO - 10.1145/2600057.2602842

M3 - Conference contribution

SN - 9781450325653

SP - 3

EP - 4

BT - EC 2014 - Proceedings of the 15th ACM Conference on Economics and Computation

PB - Association for Computing Machinery

ER -