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Strategic Trading in a Dynamic Noisy Market

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Author Info
Dimitri Vayanos
Abstract

This paper studies a dynamic model of a financial market with a strategic trader. In each period the strategic trader receives a privately observed endowment in the stock. He trades with competitive market makers to share risk. Noise traders are present in the market. After receiving a stock endowment, the strategic trader is shown to reduce his risk exposure either by selling at a decreasing rate over time or by selling and then buying back some of the shares sold. When the time between trades is small, the strategic trader reveals the information regarding his endowment very quickly. Copyright The American Finance Association 2001.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 56 (2001)
Issue (Month): 1 (02)
Pages: 131-171
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Handle: RePEc:bla:jfinan:v:56:y:2001:i:1:p:131-171

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  1. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Branko Urosevic, 2001. "Moral Hazard and Dynamics of Insider Ownership Stakes," Economics Working Papers 787, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2004. [Downloadable!]
  3. Lasse H. Pedersen & Markus Brunnermeier, 2004. "Predatory Trading," Econometric Society 2004 North American Winter Meetings 425, Econometric Society. [Downloadable!]
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  4. Matt Pritsker, 2005. "A Fully-Rational Liquidity-Based Theory of IPO Underpricing and Underperformance," Computing in Economics and Finance 2005 414, Society for Computational Economics. [Downloadable!]
  5. Matthew Pritsker, 2006. "A fully-rational liquidity-based theory of IPO underpricing and underperformance," Finance and Economics Discussion Series 2006-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Matthew Pritsker, 2005. "Large investors: implications for equilibrium asset, returns, shock absorption, and liquidity," Finance and Economics Discussion Series 2005-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics. [Downloadable!]
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