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Speculative dynamics

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  • Dan Bernhardt

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  • P. Seiler
  • B. Taub

Abstract

We then characterize analytically and numerically how the characteristics of private information—its quantity, persistence and correlation, and division among speculators—affect trading profits, pricing and trading strategies. In particular, we derive how speculators trade on new information versus old, and on private signals versus prices. We show via a frequency-domain argument that trading strategies emphasize new information versus old.

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File URL: http://hdl.handle.net/10.1007/s00199-009-0456-y
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 44 (2010)
Issue (Month): 1 (July)
Pages: 1-52

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Handle: RePEc:spr:joecth:v:44:y:2010:i:1:p:1-52

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Speculation; Market microstructure finance; Forecasting-the-forecasts; Frequency domain; Stationary linear equilibrium; E3; D4; G1; G12;

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References

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  1. Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, vol. 55(5), pages 2117-2155, October.
  2. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
  3. Foster, F. Douglas & Viswanathan, S., 1994. "Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 499-518, December.
  4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  5. Minh Chau & Dimitri Vayanos, 2008. "Strong-Form Efficiency with Monopolistic Insiders," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2275-2306, September.
  6. Dan Bernhardt & Jianjun Miao, 2004. "Informed Trading When Information Becomes Stale," Journal of Finance, American Finance Association, vol. 59(1), pages 339-390, 02.
  7. Whiteman, Charles H., 1985. "Spectral utility, wiener-hopf techniques, and rational expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 9(2), pages 225-240, October.
  8. Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
  9. Ball, J. A. & Taub, B., 1991. "Factoring spectral matrices in linear-quadratic models," Economics Letters, Elsevier, vol. 35(1), pages 39-44, January.
  10. Back, Kerry & Pedersen, Hal, 1998. "Long-lived information and intraday patterns," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 385-402, September.
  11. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
  12. Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc.
  13. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  14. Kenneth Kasa, 1995. "Signal extraction and the propagation of business cycles," Working Papers in Applied Economic Theory 95-14, Federal Reserve Bank of San Francisco.
  15. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  16. Taub, B., 1997. "Optimal policy in a model of endogenous fluctuations and assets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1669-1697, August.
  17. Taub, Bart, 1986. "The tradeoff between social insurance and aggregate fluctuations," Information Economics and Policy, Elsevier, vol. 2(4), pages 259-276, December.
  18. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-78, September.
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