Bluffing: an equilibrium strategy
AbstractThe present work studies the behavior of a monopolistic informed trader in a two-period competitive dealer market. We show that the informed trader may engage in stock price manipulation as a result of the exploitation of his informational advantage (sufficient conditions are provided). The informed trader achieves this manipulation by not trading in the first period according to the information received. This trader attempts to jam his signal or to bluff. In equilibrium this behavior is anticipated by the market maker, but still the informed continues to bluff with a positive probability. Equilibria with bluffing behavior are mixed strategies equilibria where the informed both follows and jams his information with positive probabilities. We also show that under those sufficient conditions, a pure strategy equilibrium where the informed does not bluff does not exist.
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Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n981099.
Length: 35 pages
Date of creation: Nov 1999
Date of revision:
Trade-Based Manipulation; Bluffing; Dealer Market.;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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