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Strategic Trading and Welfare in a Dynamic Market

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Author Info
Vayanos, Dimitri
Abstract

This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. The author finds that agents trade slowly even when the time between trades goes to zero. In fact, welfare loss due to strategic behavior increases as the time between trades decreases. In the limit when the time between trades goes to zero, welfare loss is of order 1/N, and not 1/N-squared as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case. Copyright 1999 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 66 (1999)
Issue (Month): 2 (April)
Pages: 219-54
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Handle: RePEc:bla:restud:v:66:y:1999:i:2:p:219-54

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  3. 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!]
  4. 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!]
  5. 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!]
  6. Silvio John Camilleri & Christopher J. Green, 2004. "The Impact of the Suspension of Opening and Closing Call," Finance 0411012, EconWPA. [Downloadable!]
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