Strategic Trading in Informationally Complex Environments

Nicolas S. Lambert, Michael Ostrovsky, Mikhail Panov

    Research output: Contribution to journalArticle

    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 value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties with a number of applications. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.

    Original languageEnglish (US)
    Pages (from-to)1119-1157
    Number of pages39
    JournalEconometrica
    Volume86
    Issue number4
    DOIs
    StatePublished - Jan 1 2018

    Fingerprint

    Strategic trading
    Liquidity
    Traders
    Asset value
    Random variables
    Trading behavior
    Competitive market
    Assets
    Informational efficiency
    Market makers

    Keywords

    • efficient market hypothesis
    • Information aggregation
    • market microstructure
    • rational expectations equilibrium
    • strategic trading

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Lambert, N. S., Ostrovsky, M., & Panov, M. (2018). Strategic Trading in Informationally Complex Environments. Econometrica, 86(4), 1119-1157. https://doi.org/10.3982/ECTA12635

    Strategic Trading in Informationally Complex Environments. / Lambert, Nicolas S.; Ostrovsky, Michael; Panov, Mikhail.

    In: Econometrica, Vol. 86, No. 4, 01.01.2018, p. 1119-1157.

    Research output: Contribution to journalArticle

    Lambert, NS, Ostrovsky, M & Panov, M 2018, 'Strategic Trading in Informationally Complex Environments', Econometrica, vol. 86, no. 4, pp. 1119-1157. https://doi.org/10.3982/ECTA12635
    Lambert, Nicolas S. ; Ostrovsky, Michael ; Panov, Mikhail. / Strategic Trading in Informationally Complex Environments. In: Econometrica. 2018 ; Vol. 86, No. 4. pp. 1119-1157.
    @article{ac6028b970df496499de03668aa414d6,
    title = "Strategic Trading in Informationally Complex Environments",
    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 value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties with a number of applications. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.",
    keywords = "efficient market hypothesis, Information aggregation, market microstructure, rational expectations equilibrium, strategic trading",
    author = "Lambert, {Nicolas S.} and Michael Ostrovsky and Mikhail Panov",
    year = "2018",
    month = "1",
    day = "1",
    doi = "10.3982/ECTA12635",
    language = "English (US)",
    volume = "86",
    pages = "1119--1157",
    journal = "Econometrica",
    issn = "0012-9682",
    publisher = "Wiley-Blackwell",
    number = "4",

    }

    TY - JOUR

    T1 - Strategic Trading in Informationally Complex Environments

    AU - Lambert, Nicolas S.

    AU - Ostrovsky, Michael

    AU - Panov, Mikhail

    PY - 2018/1/1

    Y1 - 2018/1/1

    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 value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties with a number of applications. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all 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 value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties with a number of applications. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand.

    KW - efficient market hypothesis

    KW - Information aggregation

    KW - market microstructure

    KW - rational expectations equilibrium

    KW - strategic trading

    UR - http://www.scopus.com/inward/record.url?scp=85050096648&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=85050096648&partnerID=8YFLogxK

    U2 - 10.3982/ECTA12635

    DO - 10.3982/ECTA12635

    M3 - Article

    VL - 86

    SP - 1119

    EP - 1157

    JO - Econometrica

    JF - Econometrica

    SN - 0012-9682

    IS - 4

    ER -