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Information Linkages and Correlated Trading

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  • Antonio Mele

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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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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp620.

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Date of creation: Oct 2008
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Handle: RePEc:fmg:fmgdps:dp620

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Web page: http://www.lse.ac.uk/fmg/

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Citations

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Cited by:
  1. Gray, Wesley, 2008. "Information Exchange and the Limits of Arbitrage," MPRA Paper 12621, University Library of Munich, Germany.
  2. Paolo Colla & Antonio Mele, 2008. "Information linkages and correlated trading," LSE Research Online Documents on Economics 24439, London School of Economics and Political Science, LSE Library.
  3. Ana Babus, 2011. "Strategic Relationships in Over-the-Counter Markets," 2011 Meeting Papers 1405, Society for Economic Dynamics.
  4. Jeremy C. Stein, 2007. "Conversations Among Competitors," NBER Working Papers 13370, National Bureau of Economic Research, Inc.
  5. Cho, Myeonghwan & Jun, Byung-hill, 2013. "Information sharing with competition," Economics Letters, Elsevier, vol. 119(1), pages 81-84.
  6. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  7. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
  8. Ozsoylev, Han N. & Walden, Johan, 2011. "Asset pricing in large information networks," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2252-2280.
  9. Menkhoff, Lukas & Schmeling, Maik, 2009. "Trader see, trader do: How do (small) FX traders react to large counterparties' trades?," Hannover Economic Papers (HEP) dp-415, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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