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Complementarities in Information Acquisition with Short-Term Trades

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  • Christophe Chamley

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    (Institute for Economic Development, Boston University)

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    Abstract

    In a financial market where agents trade for prices in the short-term and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and a continuum of equilibrium strategies if the cost of information is sufficient small. Imperfect observation of the past prices reduces the continuum of Nash-equilibrium to a unique one which may be a Strongly Rational-Expectations Equilibrium. In that equilibrium, because of the strategic complementarity, there are two sharply different regimes for the evolution of the price, the volume of trade and the information acquisition which is either nil or at its maximum.

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    Bibliographic Info

    Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-156.

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    Length: 37 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:bos:iedwpr:dp-156

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    Related research

    Keywords: financial markets; short-term; endogenous information; multiple equilibria; social learning; trading frenzies.;

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    References

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    1. Maria Grazia Romano, 2004. "Learning, Cascades and Transaction Costs," CSEF Working Papers 123, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Feb 2006.
    2. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
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