IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/91401.html
   My bibliography  Save this paper

Trading Motives in Asset Markets

Author

Listed:
  • Wang, Zijian

Abstract

I study how trading motives in asset markets affect equilibrium outcomes and welfare. I focus on two types of trading motives -- informational and allocational. I show that while a fully separating equilibrium is the unique equilibrium when trading motives are known, multiple equilibria exist when trading motives are unknown. Moreover, forcing traders to reveal their trading motives may harm welfare. I also use this model to study how an asset market may exit a fire sale equilibrium and how government programs may eliminate private information and improve agents' welfare.

Suggested Citation

  • Wang, Zijian, 2019. "Trading Motives in Asset Markets," MPRA Paper 91401, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:91401
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/91401/1/MPRA_paper_91399.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/92076/1/MPRA_paper_91399.pdf
    File Function: revised version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/92076/4/MPRA_paper_92076.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(4), pages 915-944.
    2. Veronica Guerrieri & Robert Shimer, 2014. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," American Economic Review, American Economic Association, vol. 104(7), pages 1875-1908, July.
    3. Andolfatto, David & Berentsen, Aleksander & Waller, Christopher, 2014. "Optimal disclosure policy and undue diligence," Journal of Economic Theory, Elsevier, vol. 149(C), pages 128-152.
    4. Veronica Guerrieri & Robert Shimer, 2018. "Markets with Multidimensional Private Information," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 250-274, May.
    5. Nicolas L. Jacquet, 2021. "Asset Classes," Journal of Political Economy, University of Chicago Press, vol. 129(4), pages 1100-1156.
    6. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
    7. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    8. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    9. Faig Miquel & Jerez Belén, 2006. "Inflation, Prices, and Information in Competitive Search," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, September.
    10. Guillaume Rocheteau, 2008. "Money and competing assets under private information," 2008 Meeting Papers 525, Society for Economic Dynamics.
    11. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
    12. Madison, Florian, 2019. "Frictional asset reallocation under adverse selection," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 115-130.
    13. Basil Williams, 2016. "Search, Liquidity, and Retention: Signalling Multidimensional Private Information," 2016 Meeting Papers 1413, Society for Economic Dynamics.
    14. Athanasios Geromichalos & Lucas Herrenbrueck, 2016. "Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 35-79, February.
    15. Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
    16. Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, American Economic Association, vol. 107(4), pages 1005-1029, April.
    17. Briana Chang, 2018. "Adverse Selection and Liquidity Distortion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 275-306.
    18. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    19. Dimitri Vayanos, 2001. "Strategic Trading in a Dynamic Noisy Market," Journal of Finance, American Finance Association, vol. 56(1), pages 131-171, February.
    20. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Athanasios Geromichalos & Kuk Mo Jung & Seungduck Lee & Dillon Carlos, 2019. "Asset Liquidity in Monetary Theory and Finance: A Unified Approach," Working Papers 1905, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James B. Davies & Samantha L. Black, 2020. "Distributional Effects of Flooding, with an Application to a Major Urban Area," University of Western Ontario, Departmental Research Report Series 20201, University of Western Ontario, Department of Economics.
    2. Zijian Wang, 2019. "Trading Motives in Asset Markets," University of Western Ontario, Departmental Research Report Series 20191, University of Western Ontario, Department of Economics.
    3. Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    4. Madison, Florian, 2019. "Frictional asset reallocation under adverse selection," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 115-130.
    5. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    6. Rocheteau, Guillaume, 2011. "Payments and liquidity under adverse selection," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 191-205.
    7. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    8. Vincent Maurin, 2022. "Liquidity Fluctuations in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 77(2), pages 1325-1369, April.
    9. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Papers (Old Series) 0901, Federal Reserve Bank of Cleveland.
    10. Barsanetti, Bruno & Camargo, Braz, 2022. "Signaling in dynamic markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 206(C).
    11. Jang, Inkee & Kang, Kee-Youn, 2021. "Adverse selection and costly information acquisition in asset markets," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    12. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    13. Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, June.
    14. Ennis, Huberto M., 2008. "Search, money, and inflation under private information," Journal of Economic Theory, Elsevier, vol. 138(1), pages 101-131, January.
    15. Zhifeng Cai & Feng Dong, 2021. "A Model of Secular Migration from Centralized to Decentralized Trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 201-244, July.
    16. Alex Edmans & William Mann, 2019. "Financing Through Asset Sales," Management Science, INFORMS, vol. 65(7), pages 3043-3060, July.
    17. Weill, Pierre-Olivier, 2020. "The search theory of OTC markets," CEPR Discussion Papers 14847, C.E.P.R. Discussion Papers.
    18. Athanasios Geromichalos & Lucas Herrenbrueck & Sukjoon Lee, 2023. "Asset Safety versus Asset Liquidity," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1172-1212.
    19. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    20. Guillaume Rocheteau, 2008. "Money and competing assets under private information," 2008 Meeting Papers 525, Society for Economic Dynamics.

    More about this item

    Keywords

    Asset markets; private information; competitive search; government intervention;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:91401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.