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Complementarities in information acquisition with short-term trades

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  • Chamley, Christophe

    ()
    (Paris-Jourdan Sciences Economiques and Boston University)

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    Abstract

    In a financial market where agents trade for short-term profit and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and, if the cost of information is sufficiently small, a continuum of equilibrium strategies. Imperfect observation of past prices reduces the continuum of Nash equilibria to a Strongly Rational-Expectations Equilibrium. In that equilibrium, there are two sharply different regimes for the evolution of the price, the volume of trade, and information acquisition.

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    File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20070441/1481/69
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    Bibliographic Info

    Article provided by Econometric Society in its journal Theoretical Economics.

    Volume (Year): 2 (2007)
    Issue (Month): 4 (December)
    Pages:

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    Handle: RePEc:the:publsh:294

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    Web page: http://econtheory.org

    Related research

    Keywords: Endogenous information; short-term gain; microstructure; strategic complementarity; multiple equilibria; Strongly Rational-Expectations Equilibrium; trading frenzies;

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    Cited by:
    1. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
    2. Dirk Bergemann & Xianwen Shi & Juuso Valimaki, 2008. "Information Acquisition in Interdependent Value Auctions," Working Papers tecipa-307, University of Toronto, Department of Economics.
    3. Manzano, Carolina & Vives, Xavier, 2011. "Public and private learning from prices, strategic substitutability and complementarity, and equilibrium multiplicity," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 346-369.
    4. Christophe Chamley, 2010. "Strategic complementarity of information in financial markets with large shocks," Annals of Finance, Springer, vol. 6(1), pages 137-145, January.
    5. Robert S. Gibbons & Richard T. Holden & Michael L. Powell, 2010. "Rational-Expectations Equilibrium in Intermediate Good Markets," NBER Working Papers 15783, National Bureau of Economic Research, Inc.

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