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Asset price manipulation with several traders

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  • Walther, A.

Abstract

In financial markets with asymmetric information, traders may have an incentive to forgo profitable deals today in order to preserve their informational advantage for future deals. This sort of manipulative behaviour has been studied in markets with one informed trader (Kyle 1985, Chakraborty and Yilmaz 2004). The effect is slower social learning. Using an extension of Glosten and Milgrom’s (1985) trading model, we study this effect in markets with N informed traders. As N grows large, each trader’s price impact subsides, and so does manipulation in equilibrium. However, the impact of manipulation on social learning can be increasing in N. As N increases, each trader individually manipulates less. But nonetheless, the increased number of manipulative actions introduces enough noise to exacerbate the impact of manipulation on learning.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1242.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1242.

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Date of creation: 08 Oct 2012
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Handle: RePEc:cam:camdae:1242

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Price manipulation; asset pricing; asymmetric information; Glosten-Milgrom model;

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  1. Park, A. & Sabourian, H., 2009. "Herding and Contrarian Behaviour in Financial Markets," Cambridge Working Papers in Economics 0939, Faculty of Economics, University of Cambridge.
  2. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, April.
  3. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, April.
  4. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
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