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Information linkages and correlated trading

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  • Paolo Colla
  • Antonio Mele

Abstract

In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase. Moreover, we find that information linkages improve or damage market depth, and lower or boost the traders’ profits, according to whether these linkages convey positively or negatively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by “neighbor” traders are positively correlated and trades generated by “distant” traders are negatively correlated.

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File URL: http://eprints.lse.ac.uk/24439/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24439.

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Length: 55 pages
Date of creation: 06 Oct 2008
Date of revision:
Handle: RePEc:ehl:lserod:24439

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Citations

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Cited by:
  1. Antonio Mele, 2008. "Information Linkages and Correlated Trading," FMG Discussion Papers dp620, Financial Markets Group.
  2. Menkhoff, Lukas & Schmeling, Maik, 2010. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1283-1302, November.
  3. Cho, Myeonghwan & Jun, Byung-hill, 2013. "Information sharing with competition," Economics Letters, Elsevier, vol. 119(1), pages 81-84.
  4. Stein, Jeremy, 2008. "Conversations among Competitors," Scholarly Articles 2799052, Harvard University Department of Economics.
  5. Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
  6. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  7. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  8. Gray, Wesley, 2008. "Information Exchange and the Limits of Arbitrage," MPRA Paper 11918, University Library of Munich, Germany, revised 31 Nov 2008.
  9. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.

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