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Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room

Author

Listed:
  • Jie Lu

    (Rutgers University)

  • Bruce Mizrach

    (Rutgers University)

Abstract

We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.

Suggested Citation

  • Jie Lu & Bruce Mizrach, 2007. "Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room," Departmental Working Papers 200701, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:200701
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    References listed on IDEAS

    as
    1. Nicolosi, Gina & Peng, Liang & Zhu, Ning, 2009. "Do individual investors learn from their trading experience?," Journal of Financial Markets, Elsevier, vol. 12(2), pages 317-336, May.
    2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    3. Werner Antweiler & Murray Z. Frank, 2004. "Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards," Journal of Finance, American Finance Association, vol. 59(3), pages 1259-1294, June.
    4. Bruce Mizrach, 2003. "Analyst Recommendations and Nasdaq Market Making Activity," Departmental Working Papers 200307, Rutgers University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    chat room; strategic information;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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