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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 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 sufficient small, a continuum of equilibrium strategies. Imperfect observation of past prices reduces the continuum of Nash-equilibrium 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 the information acquisition.

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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 WP2006-042.

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    Length: 29 pages
    Date of creation: Jul 2006
    Date of revision:
    Handle: RePEc:bos:wpaper:wp2006-042

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    Keywords: endogenous information; short-term gain; micro-structure; strategic complementarity; multiple equilibria; Strongly Rational-Expectations Equilibrium; trading frenzies.;

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    Cited by:
    1. Hellwig, Christian & Veldkamp, Laura, 2007. "Knowing What Others Know: Coordination Motives in Information Acquisition," CEPR Discussion Papers 6506, C.E.P.R. Discussion Papers.
    2. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2007. "The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey," Working Papers 2007/13, Bogazici University, Department of Economics.
    3. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2009. "The Economics Of The Uncovered Interest Parity Condition For Emerging Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 115-138, 02.

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