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Complementarities in Information Acquisition with Short-Term Trades

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  • Christophe Chamley

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    (Department of Economics, 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 - Working Papers Series with number WP2005-027.

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    Length: 37 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:bos:wpaper:wp2005-027

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

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    10. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, April.
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    14. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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